From the Tax Law Offices of David W. Klasing -Are Tax Returns Prepared by an Attorney Privileged/Protected?

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Tax Law Offices of David W. Klasing, PC

Apr 18, 2023, 06:37 ET

IRVINE, Calif., April 18, 2023 /PRNewswire/ -- When taxpayers want to avoid an audit over their filings, engage in more sophisticated tax planning, or desire more powerful representation they will often go to a Tax Lawyer to help them prepare their tax returns. This is particularly common for small businesses or individuals with particularly complex financial circumstances. However, you would do well to bear in mind that conversations about tax preparation and business decisions may not be privileged if your attorney is also your tax preparer.

Why you should use an Attorney to represent you in an audit

A recent decision in the Ninth Circuit suggests that courts will look to tailor attorney client privilege narrowly, limiting the protection that taxpayers enjoy on communications with their tax preparers. This means that many of your conversations with your tax lawyer or accountant could be brought into a court room in the unfortunate event that you face criminal tax charges.

If you have concerns about whether privilege applies to your communications with your tax preparer, you should contact the Tax Law Offices of David W. Klasing. Our experienced tax defense attorneys will readily be able to identify what communication is covered by privilege and what is not, which can be critical for your defense as well as your peace of mind. Call us today to hear more at (800) 681-1295.

Ninth Circuit Decides Against Awarding Privilege for Business Advice

In September, the Ninth Circuit Court of Appeals issued a decision that resolved a dispute between two separate approaches to determining which material enjoys legal privilege. The decision stems from a case that was heavily redacted where one party requested that the court apply a particularly broad privilege test.

The suggested test, called the "because of" test, would include all communications created in anticipation of possible litigation in the future, including documents that consisted of business advice. The argument based their version of the test on the work product privilege doctrine, which prevents an opposing party from discovering materials prepared by an attorney in preparation for litigation.

The Ninth Circuit rejected this test and instead used the more narrow "primary purpose" test. This test looks to the motivation for the communication in question. If the primary motivation for the communication was to provide business advice, the attorney-client privilege will not apply, even if the advice contemplates the potential for litigation.

In the opinion, the Ninth Circuit points out that the attorney-client privilege and the work product privilege are aimed at two different goals. Work product privilege is meant to provide litigators with the freedom to develop their strategy and legal theories in private. Attorney-client privilege, which is what may (or may not) apply here, is meant to allow free communication between lawyers and clients, specifically about legal matters.

Consequences of Ninth Circuit Decision Rejecting Business Advice Privilege

The ramifications of the Ninth Circuit's most recent decision may impact you in ways you may not be aware of. If you had a tax attorney prepare and file your tax returns on your behalf, you may be under the impression that your communications with your tax attorney were and are privileged. Based on the Ninth Circuit's decision, we suspect that they are not.

If you are already facing a government audit or fear that you may be audited in the future, you should be aware that the government can subpoena (or formally demand) your communications with your tax lawyer and use their contents against you if criminal tax charges are brought.

How Can You Get Privilege for Your Tax Defense Issues?

To have a frank, privileged conversation with a legal professional about your tax situation, we suggest that you seek out a criminal tax defense attorney. Tax defense attorneys who are consulted by clients about their exposure to potential or pending tax charges will know what communications will be protected by privilege so that you don't expose yourself further.

Tax defense attorneys may use Kovel arrangements to protect privilege. The Kovel arrangement comes from the case of the same name where it was determined that an attorney may engage an accountant to assist with rendering legal serves and thus extend the attorney-client privilege to the accountant and their communications with the client. This protects the relevant communications and prevents the accountant from being forced to testify by the government in a subsequent trial.

Privilege Issues in an Eggshell Audit

Certain audits will require a more careful approach than others when it comes to privilege. Some audits, referred to as "eggshell" audits, or reverse eggshell audits, seemingly begin as civil audits but easily could morph into criminal audits. Eggshell audits are most common where the IRS believes there is underlying evidence of fraudulent violations of the tax code underlying an audit such as suspected money laundering, income tax evasion, false returns, or other deceptive practices.

A reverse eggshell audit occurs when civil and criminal audits are being conducted simultaneously. In such circumstances, you will want to especially avoid waiving privilege on any potentially incriminating communications that could be used in a subsequent criminal trial.

Can You Make a Voluntary Disclosure if Your Tax Returns Preparation is not Privileged?

If you are afraid that past communications that you might have had with your tax preparer are not privileged, you should look to act proactively to reduce any exposure. One option that many people choose with this concern is voluntary disclosure.

Note:

As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.

It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

Depending on the circumstances of the tax violation, voluntary disclosure may do more harm than good if not handled correctly. Never attempt to engage in the voluntary disclosure process without first engaging a seasoned dual licensed Criminal Tax Defense Attorney & CPA by your side.

Get Expert, Privileged Advice from a dual licensed Criminal Tax Defense Attorney & CPA Today

The Tax Law Offices of David W. Klasing offers a rare & critical resource for those concerned about how a potential or ongoing tax audit, eggshell audit, reverse eggshell audit or criminal tax investigation could impact their net worth & liberty. To hear more about our services from a preeminently qualified and experienced dual licensed Tax Defense Lawyer & CPA call us at (800) 681-1295 or book a reduced rate initial consultation here.

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Public Contact: Dave Klasing Esq. M.S.-Tax CPA, [email protected]

SOURCE Tax Law Offices of David W. Klasing, PC