What is Accountant Client Privilege? When does it Apply?

Accountant vs. Attorney-Client Confidentiality Privilege Comparison

Accountant vs. Attorney-Client Confidentiality Privilege 

One of the key benefits of retaining an attorney for your tax matter is that there is an attorney-client privilege. The attorney-client privilege is considered sacred and the attorney does not have the right to disclose any information (unless of course, the client is going to physically hurt someone or is about to commit a serious crime). Revealing confidential information may mean losing their law license. Conversely, the accountant privilege is a minimal type of privilege that helps to protect some communications between an accountant and the client. The accountant privilege is limited and it does not apply in criminal cases. Let’s compare the differences.

Attorney-Client Privilege

The attorney-client privilege is one of the strongest privileges available. It allows a client to speak freely, openly, and honestly with their attorney, without concern that the attorney will divulge the information. The client is the person who owns the privilege and it is up to them (and not the attorney, subject to very limited exceptions) if they want to maintain confidentiality or not. In California, the attorney-client privilege can be found in Evidence Code Section 954.

Attorney Cannot (Usually) Be Forced to Testify Against You

Even though the attorney has information that can be used against the client, the attorney does not have the right to divulge communications that the client has told the attorney in confidence regarding the legal matter. That is not to say that all communications made to an attorney fall under the privilege. In other words, the mere fact that a client is speaking with an attorney does not make all of the communications privileged – they have to be legal in nature. Currently, there is a case at the Supreme Court on the specific issue of whether ancillary, non-legal advice is protected under the attorney-client privilege.

Accountant-Client Privilege (26 USC 7525 Is Limited)

There is another privilege specifically for communications made to an accountant, referred to as the accountant-client privilege, but the protections are much more limited. The protection a taxpayer receives when making communications to an accountant can oftentimes be discoverable by the IRS or other governmental agencies — so if a taxpayer has any concern that the information they tell the accountant may not remain confidential, they should be careful when speaking to an accountant.

IRS May Question the Accountant

It is important to note that the accountant privilege only applies in matters that are non-criminal and brought before the IRS or a proceeding in federal court. That means that if a taxpayer is being investigated for potential criminal fraud, evasion, or other potential criminal tax violation, then the protections do not apply. Therefore, it is very important for taxpayers who retain an accountant for a potential criminal or quasi-criminal tax matter to stay aware of the limited protection afforded for communications made under the accountant privilege.

Be Careful of Kovel (Inapplicability and Limitations)

Some inexperienced practitioners (especially in the world of offshore and international tax disclosure) misrepresent the nature and protections of Kovel to their clients. Kovel does not extend the attorney-client privilege to accountants for accounting work they perform on a tax matter. The Kovel Accountant protections apply (if at all, since it is caselaw and not statutory law) in a very narrow scenario where the attorney requires the accountant’s assistance to make an informed legal decision. In general, Kovel is not usually used by tax attorneys — and Kovel does not miraculously provide attorney-client privilege protections for tax preparation or other accountant practices.

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Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

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