Page 3 - Penalties: This Is Privileged, Right? Attorney-Client Communications in the Tax Return Preparation Context

tax advice and legal tax advice because such a distinc- the work that an accountant, or other tax preparer, or the
tion does not exist; instead, courts can better focus their taxpayer himself or herself, normally would do to obtain
analysis on whether a lawyer or non-lawyer is providing greater protection from government investigators than
the subject advice. a taxpayer who did not use a lawyer as his tax preparer
The second rationale employed by some courts to find would be entitled to … [t]he information that a person
that communications relating to tax return preparation furnishes the preparer of his tax return is furnished for the
are not privileged is that tax return preparation involves purpose of enabling the preparation of the return, not the
the communication of items that will be disclosed on preparation of a brief or an opinion letter.” 11
the return. According to these courts, when the client Other courts have properly taken a more nuanced
transmits information to the attorney “so that it might approach, understanding that not all communications and
be used on the tax return, such a transmission destroys tax return preparation engagements are created equally.
any expectation of confidentiality which might have Most notably, the Ninth Circuit in Abrahams recognized
otherwise existed.” Essentially, these courts reason that, that while “communications made solely for tax return
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because clients do not intend for the information conveyed preparation are not privileged, communications made to
in their return preparation communications to be kept acquire legal advice about what to claim on tax returns
confidential, the communications were never privileged may be privileged.” The Abrahams court noted that the
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in the first instance. This rationale oversimplifies the attorney’s “representation of his clients went beyond the
attorney-client relationship in the context of tax return mere preparation of tax returns. He was therefore entitled
preparation. Certainly, if a client provides a specific piece to the opportunity … to show that his clients … were
of information to an attorney with the intention that the seeking legal advice rather than simple return prepara-
attorney will automatically transcribe that information tion.” In distinguishing legal advice from “mere” return
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onto the return without any analysis, there is no expecta- preparation, the Ninth Circuit implicitly acknowledged
tion of confidentiality. However, if the client is providing that 1) attorneys are often hired to prepare tax returns
information to an attorney and asking the attorney to based upon their unique knowledge and skill sets; and 2)
provide advice regarding whether the information should the return preparation process frequently involves more
be reported, how the information should be reported, than computations and filling out forms. Similarly, the
or the consequences of reporting the information, then Fifth Circuit has expressed a willingness to find certain
the client is seeking legal advice from the attorney and return preparation communications between an attorney
is entitled to a reasonable expectation of confidentiality. and client to be privileged. The court in El Paso, Co. stated
The fact that the information is subsequently disclosed that “we would be reluctant to hold that a lawyer’s analysis
on a tax return does not mean that the communications of the soft spots in a tax return and his judgment on the
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leading up that disclosure cannot be privileged. By analogy, outcome of the litigation on it are not legal advice.”
clients often meet with their attorneys to prepare for depo- However, even as these more privilege-friendly decisions
sitions, where the expectation is that certain information show, attorneys and clients are likely to face an uphill battle
will be disclosed to a third party. Yet nobody would argue when defending the privilege as it applies to tax return
that the communications during the preparatory meetings preparation communications.
were not intended to be confidential simply because some
of the information discussed during the preparatory ses- Best practices: What Can attorneys
sion may be disclosed during the deposition. That certain
information in a communication may later be translated do to Best position Themselves to
onto a return does not mean that the communications defend the privilege?
occurring prior to the disclosure were not intended to be
kept confidential. Nevertheless, some courts continue What can attorneys do to protect communications with
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to promote this reasoning in denying the application of their clients, given the current state of the law surround-
the privilege to tax return preparation communications. 10 ing the attorney-client privilege and tax return prepara-
A few courts have taken a hardline approach, applying tion? The answer is that the attorney should be prepared
a blanket rule that communications relating to tax return to prove that communication with his or her client sat-
preparation can rarely, if ever, be privileged. This includes isfy the elements outlined above for the attorney client
the Seventh Circuit, which in Fredrick held that return privilege, with special emphasis on demonstrating that
preparation communications cannot be privileged because the communications involve confidential legal advice.
“a taxpayer must not be allowed, by hiring a lawyer to do To avoid any misunderstandings in a perfect world, an

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