Page 2 - Penalties: This Is Privileged, Right? Attorney-Client Communications in the Tax Return Preparation Context

PeNALtieS

attorney-Client privilege and Return According to these courts, because tax return preparation
preparation: The Case law is accountants’ work, the attorney is not working in his or
her capacity as a lawyer and the advice, therefore, is not
“The attorney-client privilege is the oldest of the privileges legal advice. Both of these are essential elements of the
for confidential communications known to the common privilege. Based on this reasoning, some courts conclude
law.” The privilege exists where “(1) [] legal advice of any that any communications relating to such non-legal ser-
1
kind is sought (2) from a professional legal adviser in his vices are not protected. 6
capacity as such, (3) the communications relating to that Unfortunately, by applying this logic in a bright line
purpose, (4) made in confidence (5) by the client, (6) are fashion, these courts fail to recognize that the preparation
at his instance permanently protected (7) from disclosure of a tax return does, in fact, require application of the tax
by himself or by the legal adviser, (8) unless the protection law to a particular taxpayer’s financial situation, which
be waived.” 2 necessarily requires legal analysis and interpretation. That
hundreds of millions of taxpayers turn to non-attorney
tax return preparers or accountants to help them file their
returns does not change the fact that the activity of prepar-
Tax law is famously complex—a ing returns requires the preparer to engage in at least some

constantly shifting maze of statutes, legal analysis. The existence of non-attorney tax return
regulations, IRS publications, and preparers can be chalked up to the American system of tax
self-reporting. The IRS’s reliance on individual taxpayers
case law. to self-report their tax situation has spurred the need for
a small army of professionals that have some expertise in
the application of the tax law, but have not otherwise com-
pleted their legal training to become attorneys. Without
On the surface, communications between an attorney the availability of these non-attorney professionals, the
and client concerning tax return preparation would appear self-reporting system would likely collapse under its own
to fall within this privilege. Indeed, even the most basic weight.
inquiries necessary to prepare a tax return, including “what The existence of these non-attorney preparers, however,
is income under Internal Revenue Code section 61?” does not mean that tax preparation is simply accounting
require the preparer to interpret the statute, regulations, work that does not involve interpretation of the tax law. To
and possibly even case law—classic legal exercises. As the the contrary, the existence of so many non-attorney prepar-
3
Southern District of New York has noted, “[c]onsidering ers means that non-attorneys are actually interpreting the
the complexities of modern tax law, it would seem that an law and possibly even practicing law in some cases. In fact,
attorney who prepares tax returns for a client is primarily the need to interpret tax law to properly file a tax return
engaged in performing legal services, and that informa- is why taxpayers prefer to seek the advice of a licensed
tion communicated to such an attorney for the purpose attorney to help prepare and file their tax returns. In such
of enabling him to prepare the return should be held to cases, when an attorney helps a taxpayer apply the tax law
come within the attorney-client privilege.” Nevertheless, to their particular facts, the attorney is giving legal advice
4
over the past few decades, courts have addressed situa- that should be protected by the attorney-client privilege.
tions involving tax return preparation where the parties The distinction certain courts make between account-
have failed to prove that their communications satisfy ing advice and legal advice in the tax return preparation
the elements of the attorney-client privilege, as described context is incorrect because even the simplest tax return
above. These courts typically focus on two rationales for preparation involves application of the tax law to the
their rulings. taxpayer’s factual situation. Instead, the proper inquiry
First, some courts start with the mistaken premise that for determining whether the attorney-client privilege
tax return preparation is inherently an “accounting service” applies to a given communication should be focused on
and reason that tax return preparation communications the communicants—is the taxpayer seeking confidential
should not be given special status just because they occur advice about the tax law from a lawyer or a non-lawyer?
between an attorney and client. Courts advancing this Only advice from a lawyer qualifies for the privilege, while
5
logic point to the fact that similar conversations regularly advice from an accountant, even if it involves interpreta-
occur between accountant and client, and that those com- tion of the tax law, is not privileged. Courts should refrain
7
munications are not imbued with any special benefits. from trying to create a false distinction between non-legal

22 JOURNAL OF TAX PRACTICE & PROCEDURE OCTOBER–NOVEMBER 2019