The Section 7525 Tax Practitioner-Taxpayer Privilege and Related Issues (Portfolio 5511)

This Portfolio, The Section 7525 Tax Practitioner-Taxpayer Privilege and Related Issues, No. 5511, discusses Section 7525 of the Internal Revenue Code, a statutory privilege applicable to communications between federally-authorized tax practitioners and taxpayers relating to tax advice.

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Description

This Portfolio, The Section 7525 Tax Practitioner-Taxpayer Privilege and Related Issues, No. 5511, discusses Section 7525 of the Internal Revenue Code, a statutory privilege applicable to communications between federally-authorized tax practitioners and taxpayers relating to tax advice. A federally-authorized tax practitioner is anyone who is authorized to practice before the I.R.S., including attorneys, CPAs, enrolled agents, enrolled actuaries, and others. With certain important exceptions, the Section 7525 privilege is co-extensive with the attorney-client privilege and thus incorporates a rather extensive body of law that has developed in the federal courts. The Portfolio discusses in detail the statute, its purpose and legislative history, the attorney-client privilege, and judicial and administrative guidance on the meaning and application of Section 7525. The Portfolio also covers related issues including state-created accountant privileges and the work product doctrine, both of which may be available to protect communications and documents made or created by non-attorney tax practitioners.

The Worksheets include the Section 7525 statute, articles and statements reflecting the public debate over the statute's enactment, legislative history, excerpts from 31 C.F.R. Part 10, i.e., Circular 230, concerning the scope of practice before the I.R.S., portions of the Internal Revenue Manual relevant to Section 7525, articles regarding the I.R.S. policy toward tax accrual workpapers, and sample privilege log entries.

This Portfolio may be cited as BNA Tax and Accounting Portfolio 5511, Boylan, Erwin, and Froelich, The Section 7525 Tax Practitioner-Taxpayer Privilege and Related Issues (Accounting Policy and Practice Series).

Authors

Kim Marie Boylan, Esq.

Kim Marie Boylan, B.S., Georgetown University (1981); J.D., Syracuse University College of Law (cum laude 1986); LL.M., Taxation, Georgetown University Law Center (with honors 1993); member, District of Columbia, Massachusetts and Pennsylvania Bars; Admitted U.S. Tax Court, U.S. Court of Federal Claims, Various U.S. Courts of Appeals; ABA Section of Taxation; Certified Public Accountant; clerk for the Hon. Robert J. Yock, U.S. Court of Federal Claims (1986-1987). Frequent lecturer on tax and accounting policy issues.

Edward L. Froelich, Esq.

Edward L. Froelich, B.A., Thomas Aquinas College (1988); M.A., Philosophy, Catholic University of America (1991); J.D., University of Virginia School of Law (1994); LL.M., Taxation, Georgetown University Law Center (1999); member, Maryland and District of Columbia Bars; Admitted U.S. Tax Court, U.S. Court of Federal Claims; Chair-elect, Section of Taxation, Federal Bar Association, Co-editor, FBA Section of Taxation Report (2004-2006); ABA Section of Taxation; clerk for the Hon. John P. Wiese, Senior Judge, U.S. Court of Federal Claims (1994-1995); trial attorney, Tax Division, U.S. Department of Justice (1995-1999).

Table of Contents

Detailed Analysis
I. Introduction
A. Privileges and Protections
1. Attorney-Client
2. Section 7525
3. Fifth Amendment
4. Settlement
5. Work-Product
B. Tax Matters
1. Planning and Advisory
2. Audit
3. Appeals
4. Litigation
II. Privileges and Protections
A. Attorney-Client
1. Standards
a. Definition
(1) Legal Advice
(2) Communication
b. Burden of Proof
c. Privilege Belongs to the Client
d. Who Is the Client?
e. Attorney-Client Privilege Does Not Extend to Tax Return Preparation
(1) General Rule
(2) ‘Research and Interpretation’ Generally Not Necessary
(3) Lawyer as ‘Scrivener’
(4) Information Intended to Be Disclosed on Return
(5) What Constitutes ‘Tax Return Preparation’?
f. Accountant-Attorneys — Dual Capacity Advisors
g. Advice Underlying a Return Position
h. Information Underlying Data on Return
i. Privilege May Not Apply to Client Identity and Nature of Fee Arrangement
(1) Client Identity Generally Not Privileged
(2) Fee Arrangements Generally Not Privileged
(3) Exceptions to General Rule
(a) Legal Advice Exception
(b) Last Link Exception
(c) Confidential Communication Exception
j. Privilege Does Not Apply to Communications in Furtherance of a Crime or Fraud
k. Privilege Does Not Apply to Transfer of Pre-Existing Records
2. Waiver
a. In General
b. Failure to Claim Privilege
c. Intentional Disclosure
d. Inadvertent Disclosure
e. The Effect of Waiver: Subject-Matter Waiver
f. Effect of Filing Amended Return
g. Electronic Communications and Waiver
3. Extensions of the Attorney-Client Privilege
a. The Kovel Doctrine
b. Extension of Kovel
c. Kovel Factors
(1) Assisting Attorney in Providing Legal Advice
(2) Assisting vs. Providing Legal Advice
(3) Tax Return Preparation Exception
(4) Serving as a ‘Translator’
(5) Under Direction of Attorney
(6) Attorney's Understanding of Subject Matter
d. Types of Communications Protected by Kovel
e. The Kovel Letter
f. Common Interest Doctrine
4. Whistleblowers
B. Section 7525
1. Background
a. Case Law History
(1) Couch v. United States
(2) United States v. Arthur Young & Co.
(3) United States v. Frederick
b. Legislative History
2. Standards
a. Applies Only to ‘Federally Authorized Tax Practitioners’
b. Applies Only to ‘Tax Advice’
(1) Meaning of ‘Tax Advice’
(2) Oral Advice
(3) Pre-Return Advice
(4) ‘Tax Advice’ Contrasted with ‘Business Advice’
(5) Section 7525 Does Not Apply to Tax Return Preparation
(6) IRS Position on Representation Letters
(7) IRS Position on Tax Reconciliation/Tax Audit Workpapers
(8) Case Law
c. Applies Only to ‘Communications’
(1) ‘Communications’ Do Not Include Underlying Facts
(2) Communication Must Be Made ‘by or for the Client’
(3) Applies Only to Communications that are ‘Confidential’
(4) Privilege Extends to Email and Other Electronic Communications
d. Exception for Written Communications in Connection with the Promotion of a Statutorily Defined ‘Tax Shelter’
(1) In General
(2) Promotion of Direct or Indirect Participation in a ‘Tax Shelter’
e. Statutory Exception for Criminal Matters
f. Privilege Applies Only to Certain Federal Tax Matters and Proceedings
g. Client Identity
h. The Privilege Must Be Claimed
(1) IRS Position on Oral Assertions of §7525
(2) Privilege Logs
(3) Burden of Proof
i. Interaction of §7525 and §6112
(1) List Maintenance Requirements for Reportable Transactions
(2) Asserting the §7525 Privilege in Response to a Request for List Information
j. In-House Tax Practitioners
k. The Kovel Doctrine in the §7525 Context
C. Fifth Amendment
1. Standards
2. Waiver
D. Settlement
E. Work-Product
1. Contrasted with Privileges
a. Long-Term Capital Holdings v. United States
b. Black & Decker Corp. v. United States
2. Standards
a. Federal Rule of Civil Procedure 26(b)(3)(A)
b. Requirements for Application
c. May Be Overcome by Opposing Party
d. Meaning of ‘In Anticipation of Litigation’
e. Dual Purpose Documents
(1) In General
(2) Tax Accrual Workpapers/Documents Prepared During Audit
f. Application to Attorneys and Other Party Representatives
g. Accountants as Consultants
h. Ordinary Work-Product Protection
i. Core or Opinion Work-Product Protection
j. Claiming Work-Product Protection
k. Crime-Fraud Exception
3. Waiver
a. Putting Information at Issue
b. Disclosure to a Third Party
c. Disclosure to Outside Auditors
d. No Subject Matter Waiver as a General Rule
III. Potential Privileges Available in the Life of a Tax Matter
Introductory Material
A. Planning
1. Transactional Planning
a. Structures Considered and Not Used
b. Opinion Letters
2. Tax Return Reporting
3. Transfer Pricing Documentation
B. Audit
1. IDRs
2. Summons
a. Civil Matters
b. Criminal Matter Being Contemplated
c. Designated Summons
C. Appeals
1. Retention of Privilege
2. FRE 408 Considerations
D. Litigation
IV. Special Considerations
A. Foreign-Based Documents
B. Mergers
V. State Privileges
Introductory Material
A. Types of State Privileges
B. Not Subject to Limitations of §7525

Working Papers

Table of Worksheets
Worksheet 1 Sample Privilege Log Entries
Worksheet 2 Federal Rule of Civil Procedure 26
Worksheet 3 Federal Rules of Evidence 408 and 501