May 12, 2010 - Phil Hodgen

Criminal tax cases, accountants, and grand juries

The attorney-client privilege.  You all know about it from TV ‘n stuff.  It matters.  A lot.  It’s been around for hundreds of years.  But accountants?  There’s no such thing as an accountant-client privilege that has been passed down from prior centuries.  As a result, the IRS sees accountants — and their work papers — as a mother lode of information to use against taxpayers, in both the civil and criminal context.


In criminal tax matters, there may be an attorney-client privilege (meaning the client can tell the attorney stuff without fear that the government will order the attorney to be a witness against the client).  But the scope of an accountant-client privilege is, well, much smaller, let’s say.  🙂  Nonexistent might be a decent practical view, if you’re a potential defendant.  Think of it this way.  You want to clean up some serious tax messes.  In order to do that you tell your accountant some stuff.  You’ve just created a potential witness against you.

One of the traditional solutions has been for the attorney to hire the accountant.  Then, arguably, the client’s communication with the accountant is covered by the attorney-client privilege — the client is communicating with a designated agent employed by the attorney.  The case law that blessed this process is Kovel v. United States, and you can check out a discussion on the topic by Jack Townsend.  Google will bring you more information about this if you use the keyword “Kovel.”  Hey, Jack, this is blog-worthy stuff for you. 🙂  For the rest of you — put Jack Townsend’s Federal Tax Crimes blog on your RSS reader.

Remember that the attorney-client privilege is one of your last firewalls.  Don’t treat it as your first layer of protection.

Latest developments

The IRS is going after accountants who do work on client matters in criminal tax cases.  Indirectly the IRS is going after the attorney-client privilege.  In the May 12, 2010 issue of Tax Notes Today, at 2010 TNT 91-4, there is yet another report from the American Bar Association’s Tax Section meeting in Washington, DC last week.  Accountants can look forward to spending some quality time in front of grand juries.  This development is consistent with the trendline we have seen from Washington DC.

From TFA:

The government will subpoena accountants employed in criminal tax cases, according to Janet Johnson, deputy division counsel (criminal tax), IRS Office of Chief Counsel, who spoke at a presentation of the Tax Bridge to Practice session of the American Bar Association Section of Taxation meeting in Washington on May 6.

In many criminal cases, “the attorney will engage the services of an accountant, and that accountant will technically be serving as the agent of the attorney and thus be covered by the attorney-client privilege,” said Juan F. Vasquez Jr. of Chamberlain, Hrdlicka, White, Williams & Martin.

“It has been successfully argued that the accountant works for the attorney. However, it does not always play out that way,” Johnson replied. “I’m not saying whether [the privilege] exists or it doesn’t exist,” but the government will subpoena the accountant, she said.

“Whether or not that accountant comes to testify can be very serious for the accountant. The grand jury may decide he is part of the problem,” Johnson warned.


First they came for the offshore bank account holders, and imposed $30,000 penalties when only $400 of tax was due.*  But I didn’t have an offshore bank account.  Then they came for . . .**


*Hey reporters, call me.

**Invoke Godwin’s Law if you like.  I don’t care. 🙂

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