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Limitations of the Attorney-Client Privilege Under Section 7525 of the Internal Revenue Code
accounting firms and law firms.11 Furthermore, Congress did not want to penalize taxpayers, pertaining to confidentiality of communications, simply because of the professional classification of the adviser.
In enacting the privilege, Congress specifically noted that the statutory attorney-privilege under Section 7525 was not to affect or limit the common law attorney-client privilege.12 The House Committee Report states that the extension of confidentiality to certain non-attorneys does not modify the attorney-client privilege.13 Accordingly, because Congress intended a narrowly tailored privilege under section 7525, the same limitations that apply to the attorney-client privilege would apply to the statutory privilege under section 7525.14 For example, the statutory privilege under Section 7525 may be waived in much the same manner as its common law counterpart.15
In reading the privilege under Section 7525, one question may be whether there is a work-product doctrine that is concurrent with the attorney-client privilege provided. As stated earlier, Congress intended a strict and narrowly tailored privilege. Although section 7525 does not explicitly address the application of the work product doctrine, the doctrine is arguably a confidentiality privilege. The answer is unclear, but the legislative history indicates that when Congress was enacting section 7525, they were "effectively codifying the attorney-client privilege, which is different from the work product doctrine.16 Additionally, the trend in federal courts has been towards narrowly tailoring the application of the common law attorney-client privilege and work product doctrine, thus hinting at similar treatment for the statutory privilege under section 7525.17
As noted above, the section 7525 privilege only applies to non-criminal matters before the IRS, and non-criminal tax proceedings in federal court. The application of this privilege to only non-criminal matters and proceeds can lead to great difficulties as many controversies often start out as civil matters and proceed to criminal matters. The fact that the privilege would only apply to non-criminal matters would lead one to believe that the privilege is automatically waived when the matter transforms from a civil tax matter to a criminal matter. Despite this wording in section 7525, many tax practitioners have taken the position that there are situations where the privilege applies in criminal matters. Practitioners argue that "communications between them and their clients during, or with respect to, a civil investigation, are protected communications. They argue that such communications are privileged from disclosure in any later criminal tax matter or proceeding."18 In other words, these practitioners are trying to "boot strap" the privilege into criminal tax matters or proceedings.
Responding to this "boot strap" of the privilege, IRS Chief Counsel has taken the position that, "the plain terms of Section 7525...provides that the tax advice privilege is not applicable in criminal matters or proceedings. This statutory privilege contains no limitations or conditions and the legislative history further indicates that none should apply."19 It seems apparent that Chief Counsel has concluded that the privilege is not applicable in criminal matters, regardless of the context in which the original communication originated. Accordingly, non-attorney practitioners may have a duty to apply a strict practice of recommending an experienced tax attorney at the first hint of criminal activity.
One inherent flaw in the privilege under section 7525 is that it may create a false expectation of confidentiality when the taxpayer engages in conversation with his or her accountant. The client may not be aware that communications relating to non-criminal matters, made privileged and confidential pursuant to section 7525, are no longer confidential and privileged communications once the matter converts to a criminal matter. This creates an additional problem for the non-attorney practitioner, as she must be able to determine when the matter goes from non-criminal, to a matter in the hands of the Department of Justice.
(11) See Mel Schwartz, Member of the
Joint Committee on Taxation Staff, Remarks at the American Bar
Association Section of Taxation 1998 Annual Meeting, Administrative
Practice Session (Aug. 2, 1998).