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Limitations of the Attorney-Client Privilege Under Section 7525 of the Internal Revenue Code


Theodore J. Joyce, Esq.


Prior to the Internal Revenue Service Restructuring Act of 1998, the attorney-client privilege was limited to communications between a taxpayer and the taxpayer's attorney1. No similar privilege was available for communications between a taxpayer and another professional, such as a certified public accountant or an enrolled agent2.

Section 7525 of the Internal Revenue Code was enacted by the IRS Reform Act of 1998, P.L. 105-206, and made effective July 22, 1998. In essence, Section 7525 created a statutory attorney-client privilege providing that the same common law protections of confidentiality which apply to communications between a taxpayer and an attorney, also apply to communications, pertaining to "tax advice", between a taxpayer and any "federally-authorized tax practitioner"3 to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney4.

The privilege under section 7525 may only be asserted in non-criminal tax matters before the IRS and non-criminal tax proceedings in federal court actions brought by or against the United States. As such, the privilege cannot be asserted against any other federal or state agencies or to state tax litigation proceedings. In addition, the privilege does not apply to "any written communication between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent or representative of a corporation in connection with the promotion of a tax shelter...."5

Under the section 7525 privilege, "Tax advice" is defined as advice given by an individual with respect to a matter that is within the scope of the individual's authority to practice before the Internal Revenue Service ("IRS")6. The problem with this definition is that it would include any tax aspect of any matter, even if the tax portion of any matter were very slight in comparison to the matter as a whole. As such, a taxpayer could claim protection for communications, assuming other elements of the privilege are satisfied, for matters that only have a minimal element of tax. Additionally, though section 7525 defines "tax advice," it does so by reference to the "tax practitioner's authority to practice before the Service7." But this is merely a reference to Circular 230 that governs practice before the IRS8. It does not define "tax advice", nor does it clarify whether "tax advice" includes providing legal advice. Because of this lack of clarification, accounting firms and other non-attorney practitioners may face the ominous task of trying to clarify the fine line between legal advice and tax advice.

There were three primary reasons cited by Congress for enacting the attorney-client privilege under section 75259. The first purpose of the privilege was to respond to aggressive behavior by the IRS in engaging in "financial status or lifestyle auditing." Simply, it was felt that the IRS was engaging in the use of Information Document Request and summons and subpoenas to seek documents from taxpayers and their representatives, simply for purposes of prying into unnecessary financial and lifestyle information10.

The second reason for enacting the privilege was that Congress was concerned with the competitive atmosphere between the two primary tax practitioner groups:

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(1) U.S. Frederick, C.A. 7 (Wis.) 1999, 182 F.3d 496.
(2) Id.
(3) "Federally authorized tax practitioner" is defined in Section 7525(a)(3)(A) as including any non-attorney who is authorized to practice before the IRS under section 330 of Title 31 of the United States Code, such as an enrolled agent, an enrolled actuary or a certified public accountant.
(4) IRC § 7525(a)(1). (unless otherwise noted, all section references are to the Internal Revenue Code of 1986 as amended and to the Treasury Regulations promulgated thereunder).
(5) IRC § 7525(b).
(6) IRC § 7525(a)(3)(B).
(7) IRC § 7525(a)(3)(A).
(8) Section 330 of title 31 of the United States Code authorized the Secretary of the Treasury to regulate the practice of representatives before the Internal Revenue Service. Pursuant to Section 330, the Secretary published the regulations in Circular 230 (31 CFR part 10).
(9) Sheryl Stratton, ABA Finally Opposes Accountant Privilege Proposal, TAX NOTES TODAY, Apr. 20, 1998 (testimony before the National Commission for Restructuring the I.R.S.) [hereinafter Stratton, ABA Finally Opposes].
(10) Dan L. Mendelson et al., The New CPA-Client Confidentiality Privilege, 29 THE TAX ADVISER 676 (1998).