The attorney-client privilege protects confidential communications between attorneys and clients. The privilege extends to an accountant hired by an attorney to assist in understanding the client’s financial information. U.S. v. Adelman, 68 F.3d 1495 (2nd Cir. 1995). Privileged attorney-client communications include expressions conveyed through conversations, documents, records and internal memoranda. Even billing and travel records, and expense reports, may be protected if they relate to a privileged matter.
U.S. v. Frederick held that advice rendered in connection with tax return preparation — whether by an attorney or by an accountant — is not privileged. Moreover, protected client communications made during tax planning may lose privileged status if those communications are incorporated into tax return preparation. 182 F.3d 496 (7th Cir. 1999). However, documents prepared for a tax audit may be privileged if they relate to impending litigation rather than to the submission of revised tax returns. Id.
The disclosure of privileged documents to third parties may result in a waiver of the privilege. See U.S. v. Brown, 478 F.2d 1038 (7th Cir. 1973). However, documents provided by clients to their accountants to assist an attorney in rendering legal advice retains its privilege. U.S. v. Schwimmer, 892 F.2d 237 (2nd Cir. 1989).
Documents prepared in anticipation of litigation are protected from disclosure under Rule 26(b)(3) of the Federal Rules of Civil Procedure. However, the “work product” doctrine was held inapplicable to an accountant’s memorandum which was prepared not in anticipation of litigation, but rather to enable the client to assess whether tax risks justified a decision to proceed with a transaction. Adelman, supra.
Section 7525, enacted in 1998, extended the attorney-client privilege to confidential communications between taxpayers and practitioners that would be privileged if the communication were between the taxpayer and an attorney. However, the scope of the privilege accorded by Section 7525 has been diminished by recent tax shelter legislation and case law. Cavallaro v. U.S. held that disclosures to accountants providing accounting services in a merger plan were not protected under tax practitioner privilege — despite the fact that the accountant had been engaged by an attorney — since the services did not facilitate the communication of legal advice. 284 F.3d 236 (1st Cir. 2002).
Appraisers may be engaged to assist in estate planning or in other tax-related matters. An appraisal made to assist an attorney in rendering legal advice may be privileged. However, if the privilege is held not to apply, all documents within the appraiser’s file, including drafts and correspondence, may be reviewable by an agent or discoverable in litigation. If a second appraiser is hired, conclusions reduced to writing by the first appraiser may be discoverable. Therefore, discussions with an appraiser concerning assumptions and methods should precede the preparation of drafts.
Code Sec. 7491 shifts the burden of proof in tax controversies to the IRS where “credible evidence” has been introduced. For this evidentiary rule to apply, the taxpayer must have complied with “reasonable” IRS requests for information and documents. The assertion of the attorney-client privilege would likely cause the IRS to argue that the taxpayer cannot shift the burden of proof.