The Accountant-Client Privilege
If you have ever read a John Grisham book or seen a legal or police procedural drama on television, then you have likely heard of the attorney-client privilege. Attorneys need honest and open dialogue with clients in order to craft an effective legal defense. Attorney-client privilege encourages trust between attorneys and clients by protecting consultations from unauthorized disclosure to any third party. In other words, an attorney generally cannot be compelled to testify or otherwise disclose the details of any matter discussed with a client.
Accounting professionals need full disclosure from their clients just as much as (sometimes more than) attorneys. However, accountants do not enjoy the same level of legal confidentiality protection as attorneys. Whether any privilege applies to consultations between accountants and clients depends on the nature of the consultation and the jurisdiction where it occurs. The two primary protections afforded to accounting clients are outlined in state law and by the Internal Revenue Code.
State law may offer some protection to accountant consultations. For example, under Title 5, Section 901.57 of the Texas Occupations Code, a Certified Public Accountant is prohibited from disclosing information communicated to him or her in connection with any engagement to a third party without the client’s permission or a court order. The court order must name the CPA and the client and specifically identify the information to be disclosed. However, since a court order in relation to a legitimate criminal proceeding is usually not difficult to obtain, Section 901.57 provides only a thin layer of protection. Other exceptions to this rule apply to administrative or disciplinary proceedings involving the CPA and the State Board, peer review, etc. Other states may have similar statutes.
The Federally Authorized Tax Practitioner Privilege provides limited protections to communications relating to federal tax matters between a CPA and a client. The relevant section of the Internal Revenue Code reads, in part:
“With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.”
In this context, “federally authorized tax practitioners” includes Certified Public Accountants.
There are limitations here. This provision only applies to federal tax advice, not business advice or other matters. It does not apply to a return that has actually been filed with the IRS or to information that has already been shared with another third party. By definition, information shared with the government cannot be privileged, though tax returns are protected by strict privacy rules from disclosure outside the IRS.
Clients who have need of advice from a CPA that is legally exempt from disclosure should consult an attorney first. An accountant that is retained by an attorney in connection with the attorney’s engagement with a client generally falls under the umbrella of the attorney’s privilege. An agreement by a CPA to be retained by attorney to consult on a matter, commonly known as a “Kovel Agreement,” documents the relationship in order to ensure protection under the law.
Accountants need cooperation and honesty from clients in order to provide good advice. Understanding your needs upfront will allow your CPA to decide the best way to protect your privacy within the boundaries of federal and state law.
