A. Primary AuthorityB. BasicsC. Relationship to the Attorney-Client PrivilegeD. Relationship to Practice of LawE. Rationale Behind IRC §7525F. Who Needs to Understand New §7525 and What Should They Be Aware OfG. Privilege Review—Purpose/Rationale/AuthorityH. Privilege Review—Selected Reminders From the CourtsI. Waiver—Some Comments From the CourtsJ. Dealing With §7525K. Miscellaneous Observations and Queries© Annette Nellen, January 1999.Confidentiality Privilege Relating toTaxpayer Communications—New §7525Added by the IRS Restructuring & Reform Act(P.L. 105-206; 7/22/98; Act §3411)Annette Nellen, CPA, Esq.Graduate Tax ProgramSan José State UniversityMarch 1999A. Primary AuthoritySee the text of IRC §7525 and IRSRRA'98 Committee Reports at the end of this outline.B. BasicsThe IRSRRA'98 extends the common law attorney-client privilege of confidentiality withrespect to tax advice to any federally authorized tax practitioner (attorneys, CPAs, EnrolledAgents, and Enrolled Actuaries). This privilege is intended to apply to the same extent as itwould between a taxpayer and an attorney; it does not expand the attorney-client privilegethough. The §7525 privilege, if otherwise applicable, applies to tax advice furnished to a client-taxpayer or potential client-taxpayer. However, the privilege may only be asserted in anoncriminal tax matter before the IRS and any noncriminal tax proceeding in federal court byor against the U.S. "Tax advice" is defined as advice given by an individual with respect to amatter within the scope of the individual's authority to practice as a federally authorized taxpractitioner (Circular 230) that involve matters under the IRC (Title 26). Thus, the §7525privilege cannot be asserted to prevent any other regulatory agency (such as the SEC) or personfrom compelling the disclosure of information. The §7525 privilege does not apply to anywritten communication between a federally authorized tax practitioner and a director,shareholder, officer, or employee, agent, or representative of a corporation in connection withthe promotion of the direct or indirect participation of the corporation in any tax shelter (per thedefinition at §6662(d)(2)(C)(iii)). New IRC §7525 applies to communications made on or afterJuly 22, 1998.Section 7525 goes beyond Rule 301 of the AICPA Code of Professional Conduct. Rule 301,Confidential Client Information, provides that a member in public practice shall not discloseany confidential client information without the client's consent. An exception exists if themember is required to comply with a validly issued and enforceable subpoena or summons.The §7525 privilege is legally enforceable (unlike Rule 301) and will prevent disclosure, evenif compelled by the IRS through a summons (however, other limitations might apply, asdiscussed later). Also see California Board of Accountancy Regulation 54.1, Disclosure ofConfidential Information Prohibited.C. Relationship to the Attorney-Client Privilege"The privilege established by [§7525] applies only to the extent that communications would beprivileged if they were between a taxpayer and an attorney. Accordingly, the privilege does not© Annette Nellen 1999 2 Confidentiality Privilege Between CPA and Clientapply to any communications between a [CPA, EA, or enrolled actuary] and such individual'sclient (or prospective client) if the communication would not have been privileged between anattorney and the attorney's client or prospective client. For example, information disclosed to anattorney for the purpose of preparing a tax return is not privileged under present law. Suchinformation would not be privileged under the provision whether it was disclosed to anattorney, certified public accountant, enrolled agent or enrolled actuary." [Senate CommitteeReport No. 105-174]Thus, CPAs and EAs will need to become familiar with the attorney-client privilege in order tofully understand the §7525 privilege. This will entail understanding what types ofcommunications are covered by the privilege, what is not covered and whether it can/should becovered by the attorney-client privilege through a Kovel arrangement, how the privilege can bewaived, what types of tax work fall within the privilege, and the differences between theprivilege and the work-product doctrine.D. Relationship to Practice of Law"[§7525] relates only to matters of privileged communications. No inference is intended as towhether aspects of federal tax practice covered by the new privilege constitute the authorizedor unauthorized practice of law under various State laws." [Conference Committee Report No.105-599]1. The attorney-client privilege only applies to legal advice. If a client sought investmentadvice from an attorney, the privilege would not apply. So, if the §7525 privilege is only toapply to the extent that communications would be privileged if they were between anattorney and a client, does this mean that the CPA or EA is providing legal advice (absentthe above caveat in the legislative history)? Or, did Congress intend that "tax advice" wasto be used in place of legal advice, such as in reading court cases that shed light on theattorney-client privilege?2. The majority of courts have held that the preparation of a tax return is not legal advice.[Canaday v. U.S., 354 F.2d 849 (8th Cir. 1966)—attorney's tax prep work described asscrivener's work; U.S. v. Davis, 636 F.2d 1028, 1043 (5th Cir. 1981), cert denied 454 U.S.862 (1981)—"although preparation of tax returns by itself may require some knowledge ofthe law, it is primarily an accounting service."] However, a few courts have held that taxpreparation can be legal advice, basically because it is performed by an attorney. [U.S. v.Willis, 565 F.Supp. 1186 (S.D. Iowa 1983)—"While preparation of tax returns is a taskengaged in by nonlawyers as well as lawyers, such preparation ordinarily requires thegiving of at least some legal advice." U.S. v. Summe, 208 F.Supp. 925 (E.D. KY 1962)—"There is nothing about the service of a lawyer in filing an income tax return that wouldnecessarily take it out of these qualifications [for the privilege]."]In In re Grand Jury Investigation-Appeal of Schroeder, 842 F.2d 1223 (11th Cir. 1987), thecourt noted that "the preparation of a tax return should not be viewed as legal advice. If aprofessional accountant prepares a tax return, his client cannot invoke any privilege, forthere is no accountant-client privilege under federal