Page 4 - Penalties: This Is Privileged, Right? Attorney-Client Communications in the Tax Return Preparation Context

PeNALtieS

attorney who is giving legal advice to a client concern- the purpose of completing the forms could be billed to
ing how or what to report the client’s tax return should the “tax return preparation” engagement.
refrain from actually preparing the client’s tax forms. These two engagements can occur separately, where the
Rather, the attorney should refer the client to a third- legal advice is rendered prior to any tax form preparation,
party accountant for the preparation of the forms that or concurrently. For instance, the attorney may be in the
will be submitted to the Internal Revenue Service. The process of preparing tax forms and encounter something
attorney can then provide the accountant with instruc- that requires further legal analysis and additional com-
tions and need-to-know information for completing the munications with the client. The attorney can pause the
return, while maintaining the position that his or her “tax return preparation” engagement, and restart work
communications with the client are separate privileged under the “legal advice” engagement. Once the attorney
and confidential legal advice. Such tactics are especially conducts the necessary research, communicates with the
appropriate in situations where the client has disclosed client to obtain information necessary for his legal analysis,
highly-sensitive or possibly incriminating information and renders the resulting advice, the attorney can pause or
to the attorney in the course of seeking tax advice. By close the “legal advice” engagement and resume working
separating the acts of providing legal advice from those under the “tax return preparation” engagement.
of preparing tax forms, it is much easier for attorneys While having two matters relating to tax advice may
and courts to draw the line between communications seem excessive, having two distinct matters makes it much
concerning legal advice and “mere” tax return prepara- easier to prove that the attorney was not retained to simply
tion. As the cases discussed above show, this separation plug numbers onto a form, but rather to provide lawyerly
and distinction may prove critical if the communications services (legal analysis and advice). By proactively setting
between attorney and client become the subject of a up these separate engagements, the attorney can start
privilege dispute. any subsequent privilege dispute in an offensive position.
Of course, we do not live in a perfect world, and The attorney whose only billed engagement was for “tax
attorneys are likely to continue finding themselves in the return preparation” will likely find himself in a defensive
situation where they are required to both provide their posture, where he must convince a court that the client
clients with legal advice as well as fill out tax forms. In this retained him not simply to prepare tax forms, but also to
scenario, the client and attorney may be forced to prove render legal advice.
which communications were intended to be confidential While these suggestions are not foolproof, particularly
communications of legal advice. To assist in meeting this in those jurisdictions that take a hardline approach to the
evidentiary burden, it would be helpful for an attorney privilege, they will help the client and attorney to prove
to open two separate engagements or matters for the that the legal communications were separate from simply
client—one for “legal advice” and one for “tax return filing out the tax return. Ultimately, for the legal commu-
preparation.” When the client solicits advice about how nications to be privileged, they must meet all elements of
or if he should report something on his return, and that the privilege and it will be up to the client invoking the
question requires legal analysis, these communications privilege to prove each of those elements. By using these
could be billed to the “legal advice” engagement. Once best practices, the attorney who prepares tax returns will
the legal issues are sorted out, activities such as actually be in the best possible position to assert and defend a
filling out the return forms and communicating solely for privilege claim, if such a need arises.

ENdNOTEs
1 Upjohn Co., SCt, 81-1 ustc ¶9138, 449 US 383, 389, 6 C.E. Davis, CA-5, 81-1 ustc ¶9193, 636 F2d 1028, 11 R.A. Frederick, CA-7, 99-1 ustc ¶50,465, 182 F3d
101 SCt 677. 1043. 496, 500.
2 M. Richey, CA-9, 2011-1 ustc ¶50,168, 632 F3d 7 But see Code Sec. 7525 (tax practitioner 12 C.L. Abrahams, CA-9, 90-1 ustc ¶50,310, 905 F2d
559, 566 (quoting Graf, CA-9, 610 F3d 1148, 1156 privilege). 1276, 1284 (emphasis in original), overruled on
(2010)). 8 J.M. Lawless, CA-7, 83-1 ustc ¶13,527, 709 F2d 485, other grounds L.F. Jose, CA-9, 98-1 ustc ¶50,119,
3 Code Sec. 61. 487–488. 131 F3d 1325.
4 In re E.E. Colton, DC-NY, 62-1 ustc ¶9189, 201 9 In re Colton, DC-NY, 201 FSupp 13, 16 (1961), aff’d 13 Id.
FSupp 13, 16. sub nom. Colton, CA-2, 62-2 ustc ¶9658, 306 F2d 14 El Paso, Co., CA-5, 82-2 ustc ¶9534, 682 F2d 530,
5 In re Grand Jury Proceedings, CA-7, 2000-2 ustc 633. 539.
¶50,598, 220 F3d 568, 571. 10 Lawless, 709 F2d 485, 487–488 (1983).

24 JOURNAL OF TAX PRACTICE & PROCEDURE OCTOBER–NOVEMBER 2019