When Would an Accountant-Client Privilege Arise?

An accountant-client privilege allows for confidential communication between a client and their accountant. This privilege is designed to encourage clients to share complete and accurate financial information without fear of disclosure. However, this confidentiality is distinct from the attorney-client privilege, which offers a much broader scope of protection. The existence and extent of an accountant-client privilege are often misunderstood, as its application is not universal and depends heavily on specific circumstances.

The Nature of Accountant-Client Privilege

A general common law federal accountant-client privilege does not exist in the United States. Instead, federal law provides a limited privilege under Internal Revenue Code (IRC) Section 7525, often referred to as the tax practitioner privilege. This federal privilege applies only to non-criminal tax advice given by a federally authorized tax practitioner, such as a Certified Public Accountant (CPA), enrolled agent, or attorney authorized to practice before the IRS. It is important to understand that this limited federal privilege does not extend to criminal tax matters or to communications with individuals who are not authorized tax practitioners.

Accountant-client privilege primarily arises through specific state statutes. Many states have enacted laws granting confidentiality to communications between clients and their accountants. These state laws vary considerably, with some offering stronger protections than others, and some states not recognizing such a privilege. The attorney-client privilege, in contrast, is more universally recognized at both federal and state levels and generally covers all legal advice, providing a more robust shield for confidential communications.

Scope and Limitations of the Privilege

When accountant-client privilege arises, it typically covers confidential communications made for obtaining tax advice or other specific accounting services. The client must intend for the communication to remain confidential and seek professional advice from the accountant. Such protected communications might involve discussions about tax planning, business transactions, or financial restructuring.

Communications directly related to preparing tax returns are generally not privileged, as the information is intended for disclosure to the government. The privilege typically does not protect communications made in furtherance of a crime or fraud. This exception applies even if the accountant was unaware of the client’s fraudulent intent, and the crime or fraud does not need to have been completed for the exception to apply.

The federal privilege under IRC Section 7525 does not apply in criminal tax investigations or proceedings. This means that even if the privilege would otherwise apply, it offers no protection if a tax matter becomes criminal. Furthermore, the privilege generally does not cover non-tax related services, such as audit, review, compilation, or general business consulting that is not directly related to tax advice. Disclosing privileged information to a third party, outside of specific exceptions such as an attorney working on the same matter under a “Kovel” arrangement, can also waive the privilege. In a “Kovel” arrangement, an attorney hires an accountant to help understand complex financial information to provide legal advice, thereby potentially extending the attorney-client privilege to the accountant’s work.

State-Specific Considerations for Accountant-Client Privilege

The existence and scope of accountant-client privilege vary significantly across states, as each state may have its own statute or no statute. A privilege recognized in one state may not apply in federal court or in the courts of another state, especially if the communication crosses state lines or involves federal issues. This variability underscores why the privilege might arise differently depending on the geographic location of both the client and the accountant.

Common requirements in state statutes for the privilege to arise include specific licensing for the accountant, such as being a Certified Public Accountant (CPA). The service provided must typically be accounting-related, and the communication must be made with an expectation of confidentiality. Without these elements, the protection may not apply.

The jurisdictional aspect means that a communication protected under one state’s law might still be discoverable in federal proceedings or in a court in a state that does not recognize such a privilege. For example, the federal privilege under IRC Section 7525 only governs the IRS and federal courts, leaving states free to establish their own rules regarding privilege. Given the complexity and variability of these laws, individuals should seek legal advice from an attorney regarding their specific situations to understand the nuances of privilege and its applicability.