Tax Privilege, A Mixed Blessing

By James A. Woehlke, CPA

Nestled in the IRS Restructuring and Reform Act of 1998 signed by President Clinton on July 22, is a brief, 25-line Internal Revenue Code provision that may significantly change the way CPA tax practitioners do business. IRC section 7525, Confidentiality Privileges Relating to Taxpayer Communications, extends the protections afforded by the attorney-client privilege to communications between taxpayers and CPAs, enrolled agents, and enrolled actuaries.

The confidentiality benefit provides an opportunity for tax practitioners to better protect the public but CPAs should be cautious and learn more about the provision to best service clients. While at first blush the provision sounds like cause for great rejoicing, it may be a bittersweet victory.

"This is a major step forward," said Gerald W. Padwe, AICPA vice president of taxation, "It is a sea change for CPAs. It is critical that CPAs study these provisions and understand exactly what is covered by the privilege extension and what is not."

To understand this new confidentiality privilege, it is important to first understand the attorney-client privilege. A CPA who is unfamiliar with how the attorney-client privilege works and exactly how much the IRS Restructuring Act extends the privilege to other tax practitioners could mistakenly lose the privilege for the client. That might constitute malpractice. And that is why all CPA tax practitioners must learn the ins and outs of the privilege.

"CPAs need to learn that the privilege belongs to the client," said David A. Lifson, NYSSCPA vice president and vice chair of the AICPA Tax Executive Committee. "Being authorized to hold confidences creates added responsibilities."

File-handling procedures, office layout, and office etiquette, for example, may all need to change in order to protect what can and cannot be deemed as privileged information between CPAs and clients.

There also are some limitations noted in the IRS Restructuring Act. For example, the confidentiality protection will not apply to planning involving corporate tax shelters. It also does apply to tax return preparation because the attorney-client privilege itself does not apply for preparation. See the October issue of The CPA Journal for a detailed article on the new confidentiality privilege.

The extension of the confidentiality privilege has drawn an expression of concern from bar associations. Representatives of the New York State Bar Association see the extension of the confidentiality privilege as an attempt by accountants to move into areas in which only attorneys are now permitted to practice.

Despite the legal community's concerns, the deed is done. The confidentiality privilege has been extended to additional tax practitioners and it behooves CPAs to quickly and thoroughly learn about their new responsibilities to preserve their clients' privileges.