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tax preparation are not privileged.
The CPA should carefully note this
At the first sign exception: Obviously, if the privilege As has
that something may exception does not extend to at- been held
be ‘awry,’ the CPA torneys preparing returns, it certainly many times in
will not extend to a CPA tax return
should consider preparer. And, overwhelmingly, federal courts,
suspending services taxpayer communications with a communications
CPA arise in the context of return
and referring the preparation. pertaining to income
client to a Limitations of the Kovel tax preparation are
tax attorney privilege not privileged.

This is a privilege that derives from the
attorney-client privilege. Basically, it
(work product). Privilege protection extends any applicable attorney-client federally authorized tax practitioner
often extends indefinitely — beyond the privilege to any party necessarily retained (which includes a properly licensed
client engagement or relationship and by an attorney to enable him or her to CPA). However, the statute provides
even death. provide legal advice to a client. Thus, that the protection is no greater or
However, privilege protection may the attorney can retain a CPA to assist less than the attorney-client privilege.
easily be “waived”: for example, when in providing tax advice to a client, and Consequently, it clearly does not extend
the communication or work product is the attorney’s communication protection to communications related to return
shared with or is affirmatively revealed extends to the CPA; this may include preparation and filing obligations. It
to a nonprivileged person (some pro- assistance in determining and calculating also specifically does not apply to tax
tection exists for inadvertently shared a tax liability. However, Kovel privilege shelter advice — whether or not return
waiver). Also, once privilege is “waived” does not protect from disclosure any preparation is involved.
— even if only to an aspect of a mat- CPA-client (taxpayer) communications Critically, too, it does not apply to a
ter in contention — the government and work product that preexisted the criminal matter, and it is retroactively
may successfully argue that privilege Kovel arrangement, so it is often difficult removed when the IRS launches a
is waived for the entire matter, i.e., it if not impossible for Kovel protection subsequent criminal investigation.
constitutes subject-matter waiver with to extend to a CPA who has historically This poses a danger for the unaware
regard to the entirety of the communica- been the client’s tax adviser or preparer. practitioner who allows a taxpayer to
tion related to the matter. It is an issue of when did you know it? reveal potential criminal motivation
Also, there are three significant And the government will invariably con- or activity believing that privilege
exceptions to the privilege protection in tend that the knowledge was obtained applies, only to find that the CPA may
the tax arena: prior to the Kovel retention. be required to serve as a witness for
■ The protection does not apply to Finally, if the CPA whom the at- the prosecution in a criminal matter
“business” advice, and the IRS and torney retains prepares tax returns as sometime later.
Department of Justice have success- part of the engagement — for example,
fully litigated this issue. amended returns for foreign disclosure Limitations of the
■ There is a “crime-fraud” exception for items or previously unreported income work-product doctrine
privilege claims; that is, communica- — communication protection related to Another privilege, the judicially
tions are not privileged if the attorney the returns is waived retroactively with created work-product doctrine,
is found to participate in or enable regard to preparation communications prevents compelled disclosure of
a client’s fraud (or to cover it up). and underlying work product once the materials and legal analysis and related
The IRS has recently indicated an returns are submitted. communications — including those of
intention to more aggressively pursue the lawyer and any expert — created
this exception to privilege claims. Limitations of the statutory in anticipation of litigation. Notably,
■ Most importantly, as has been held privilege it does not protect any information or
many times in federal courts, com- Sec. 7525 provides a statutory privilege communication retroactively. Also, there
munications pertaining to income for taxpayer communication with a is ample case law that requires more

www.thetaxadviser.com August 2022 37