Page 1 - Penalties: This Is Privileged, Right? Attorney-Client Communications in the Tax Return Preparation Context

Penalties

BRYaN C. sKaRlaTOs is a Partner at
Kostelanetz & Fink, LLP in New York.
sTEpHEN a. JOsEY is an Associate at This Is Privileged, Right? Attorney-Client
Kostelanetz & Fink, LLP.
Communications in the Tax Return

Preparation Context

By Bryan C. Skarlatos and Stephen A. Josey

ax law is famously complex—a constantly shifting maze of statutes, regu-
lations, IRS publications, and case law. As such, the process of filing tax
T returns can be an arduous task for the hundreds of millions of taxpayers
who are required to do so each year because the preparation of each and every tax
return necessarily involves the interpretation and application of the tax laws to the
facts of a particular taxpayer’s financial situation. This is why taxpayers often turn
to trained professionals such as return preparers, enrolled agents, accountants,
and tax lawyers to help them file their returns.
Because the large majority of taxpayers have relatively straightforward financial
profiles, the way in which the tax law applies to their tax reporting requirements is
similarly straightforward. These taxpayers are usually well served by non-attorney
tax return preparers or accountants. However, even the smallest financial transac-
tion can require a surprisingly complex analysis of the tax law before it can be
correctly reported. When such issues arise, many taxpayers prefer to consult with
an attorney for the purpose of obtaining advice on the application of the tax law
to their specific factual situations.
When a taxpayer consults a tax attorney in connection with the preparation
and filing of a tax return, an important question arises about whether the com-
munications between the taxpayer and the attorney are subject to the attorney-
client privilege. The attorney-client privilege is a bedrock of the American legal
profession. The privilege typically protects communications between an attor-
ney and client from discovery by third parties, and is uniformly viewed as an
essential tool for facilitating the candid exchange of information that attorneys
need to effectively advise their clients. Most clients, and many attorneys, would
therefore be surprised to learn that some courts have ruled that communications
between an attorney and client during a tax return preparation engagement are
not privileged.
This column will explore the case law in this area and outline some best practices
attorneys can use to help prove that sensitive communications with clients related
to tax return preparation are shielded from disclosure in response to discovery
requests, an Internal Revenue Service summons, or a grand jury subpoena.

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