Accountant Liabilities for Privileged Information

Supreme Court Standard 503, Lawyer-Client Privilege, says a client has a privilege to refuse to disclose, and to prevent others from disclosing, confidential communications made for the purpose of facilitating the provision of legal services to the client. The communications can be:

• Between the client or the clients representative and his or her lawyer or the client’s lawyer’s representative.
• Between the client’s lawyer and that lawyer’s representative.
• Made by the client and his or her lawyer representing another in a matter of common interest.
• Between representatives of the client.
• Between lawyers representing the client.

An attorney owes her client the duty to provide competent and diligent representation.

An attorney must know well-settled principles of law applicable to a case and discover what law can be found through a reasonable amount of research.

An attorney’s competence and diligence are judged against those of a reasonably competent general practitioner of ordinary skill, experience, and capacity, ups the attorney holds herself out as being expert in some area of law, in which case she is held to the higher standard of care expected of a reasonably competent expert practitioner in that area of the law.

Restatement Rule Section 552(2) of the Restatement (Second) of Torts extends the “Ultra mares Rule,” holding that accountants are also liable to third parties

• For whose benefit and guidance, the accountant intends to supply the information or knows that the recipient intends to supply it; or
• Whom the account intends the information to influence of knows that the recipient so intends.

Reasonably Foreseeable Users: A minority of courts hold accountants liable to any user whose reliance on the accountant’s report was reasonably foreseeable to the accountant at the time she prepared the report.

Due Diligence Defense: An accountant can avoid Section 11 liability if he can show that, after reasonable investigation, he had reasonable grounds to believe, and did believe, that the financial statements were true and complete at the time the accountant made them.

A case for applying attorney-client privilege to accountants can be made when

• An attorney-client relationship exists.
• An accountant is retained by the attorney.
• The accountant renders services that abet the provision of legal services.
• The parties do not waive the privilege.

Diversified standard, the attorney client privilege applies to an employees communications if

• The communication was made to get legal advice.
• The employee making the communication did so at the direction of his or her corporate superior.
• The superior made the request so the corporation could get legal advice.
• The subject of the communication is within the scope of the employees corporate duties.
• The communication was not shared with anyone other than those who, because of the corporate structure, needed to know its contents.

The Statute

The I.R.C. extends “the same common law protections of confidentiality . . . 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.” Remarkably, however, the privilege does not apply to the preparation of a tax return. That, of course, raises the question of what exactly it covers.

The privilege extends only to tax advice, which has been defined as advice given by a federally-authorized tax practitioner within the scope of their authority under 31 U.S.C.A. § 330. In this respect, it is important for practitioners to distinguish between the tax advice covered by the privilege, and general business or financial planning advice which is not covered by the privilege. Importantly, the privilege is not available where it is needed most: it cannot be used in a criminal proceeding. Nor can it be used in state court proceedings (such as a divorce or civil suit). It can only be asserted in a noncriminal tax proceeding before the IRS or in a noncriminal tax proceeding in federal court.

Exceptions

Even where it otherwise applies, there are two notable exceptions to this privilege. First, there is a crime-fraud exception. Where communication is made in furtherance of a crime or fraud, the communication may not be privileged. Another notable exception to the privilege is statutory. Under I.R.C. § 7525(b), any written communication “in connection with the promotion of the direct or indirect participation of the person in any tax shelter” is not privileged.