In United States v. Barrett, the court declined to block an accountant's testimony concerning tax return preparation, holding that the attorney-client privilege and work product doctrine do not apply. 2023 WL 6784364 (M.D. La. 2023). The court determined that the attorney-client privilege does not extend to communications with accountants, even considering a Kovel agreement, when disclosure to the IRS is contemplated.
Barrett is a physician who owns a holding company (LLC), which includes in its holdings urgent care clinics. At issue in this criminal case was the omission of ownership in the LLC on IRS Form 433-A. The IRS alleges that Barrett committed "affirmative acts of evasion" by not properly claiming ownership and paying the required tax. Barrett had been represented by a law firm that employed an accountant as part of their tax team. The accountant "assisted Dr. Barrett in filing disclosures and advised Dr. Barrett on various administrative actions."
Form 433-A requires that taxpayers disclose their "investments," including LLCs in which the taxpayer has ownership. The form submitted to the IRS was certified and signed by the accountant and included the ownership of the LLC on the cover page, but not in the form itself. The IRS alleged that "a competent tax attorney" would have properly included the ownership on the form, and to that end, issued a subpoena to compel the accountant's testimony. Barrett and the law firm filed motions to quash the subpoena, basing their motions on the attorney-client privilege and work product doctrine.
The court outlined that attorney-client privilege extends only to: "(1) a confidential communication; (2) to a lawyer or subordinate; (3) for the primary purpose of securing a legal opinion, legal services, or assistance in the legal proceeding." For an accountant (or other expert) to fall under this rule, lawyers often utilize Kovel agreements, where the accountant is helping the attorney provide legal advice. See United States v. Kovel, 296 F.2d 918, 922 (2d. Cir. 1961).
However, the court explained that in the Fifth Circuit, even in light of a Kovel agreement, "unless the accountant is translating complex tax terms into a form intelligible to a lawyer or at the lawyer's behest," the communications are not privileged. The court, finding that the moving parties did not provide any details as to the accountant's work, rejected the privilege altogether. Had the parties properly outlined the activities and responsibilities of the accountant, it is possible that the outcome may have been different.
Similarly, the court described that the work product doctrine applies when "the primary motivating purpose behind the creation of the document was to aid in possible future litigation." The court found that no information was provided to support a claim that the work the accountant completed was done in anticipation of litigation and denied the motion on those grounds.
Further, even if privilege did exist, the defendant waived the protection by injecting into the trial a question of good faith and reliance on the accountant to have completed the forms correctly. As such, the court held that "the Government must be allowed to question" the accountant to investigate the circumstances surrounding the Form 433-A to determine if a mistake or negligence occurred.
This case serves as a useful reminder of several recurring privilege issues, (1) the challenges of maintaining privilege for tax return preparation, (2) that when engaging experts, Kovel arrangements must be evaluated with care for the best chance at maintaining privilege, and (3) the risk that privilege can be waived by putting protected communications "at issue" as part of a defense.
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