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TAX PRACTICE & PROCEDURES

Protecting privilege for new
clients and existing clients The work-product
The CPAs are often approached by a
many state prospective client who has significant doctrine has been
accountancy income and has not filed returns for one, the subject of
some, or many years, and who wants to
laws that file returns before the IRS “catches up significant litigation
address ‘client with me.” over tax opinions
That nonfiling may arise for any
confidentiality’ number of reasons. But one thing is provided to
do not provide certain: The client is “new,” and the independent auditors
privilege protection CPA does not know those reasons. In for purposes of their
this situation, the CPA should not even
regarding tax begin to listen to the client; instead, the evaluation of
authority inquiries. client should be advised to engage the uncertain tax
services of a tax attorney familiar with positions in financial
criminal and civil fraud tax matters.
The CPA’s duty is absolute in these statement audits.
situations: Protect the client’s privilege!
than a mere possibility of litigation. The CPA simply does not know what
While litigation does not need to the client may reveal, and once the
have commenced, there should be a possibility of a willful intention to evade In the course of tax practice, the
realistic possibility. a tax obligation is revealed, the CPA CPA is in a position to do great harm to
The work-product doctrine has been is in the uncomfortable position of the client when it comes to protecting
the subject of significant litigation over becoming a witness for the prosecution. not just confidential client data but
tax opinions provided to independent Recall our discussion of applicable also the confidentiality of the client’s
auditors for purposes of their evaluation privileges — none apply. What is likely communications about his or her tax
of uncertain tax positions in financial to occur is that the potential client matters. The fundamental duty of the
statement audits. The government consults with an attorney who sends him CPA tax practitioner should be similar
will argue that providing the lawyer’s or her back to the CPA for preparation to that of the Hippocratic Oath of the
confidential analysis and tax opinion of the necessary filing — most likely medical profession: “First, do no harm.”
to an auditor for financial statement after a Kovel engagement is in place. From Kip Dellinger, CPA, Sherman
purposes constituted waiver of the With regard to an existing client Oaks, Calif. ■
privilege — or, in the alternative, that subjected to an IRS examination, the
the tax opinion was not prepared in CPA should monitor and evaluate the
anticipation of litigation but instead information and activity of the IRS
was prepared for business purposes, examination and listen very carefully to
specifically to satisfy financial statement the client when communicating with the Contributor
auditors. Taxpayer-corporations seeking client. Again, at the first sign — from
work-product protection for these tax either the IRS or from the client — that Kip Dellinger, CPA, is the senior tax
opinions have prevailed in some cases. something may be “awry,” the CPA partner at Kallman + Logan & Co. LLP
But, overwhelmingly, in the CPA should consider suspending services and in Sherman Oaks, Calif. He serves on
profession — aside from large taxpayers referring the client to a tax attorney for the AICPA Tax Practice and Procedures
that self-prepare returns — protecting advice and guidance — for the same Committee and is a past chair of the
financial statement tax provision reason discussed earlier: to protect the AICPA Tax Practice Responsibilities
advice is a moot point because the client’s “privileges.” This action is also Committee and a past member of the
auditor is the CPA who prepares the consistent with AICPA Statement Tax Executive Committee. For more
entity’s tax returns (and often provides on Standards for Tax Services No. 6, information on this column, contact
the tax advice) and the tax return Knowledge of Error: Return Preparation thetaxadviser@aicpa.org.
communication is not protected. and Administrative Proceedings.

38 August 2022 The Tax Adviser