Kovel Letter (2018) - Attorney-Client Privilege when Hiring a CPA? (Golding & Golding, Board Certified Tax Law Specialist)

Kovel Letter (2018) – Attorney-Client Privilege when Hiring a CPA? (Golding & Golding, Board Certified Tax Law Specialist)

Kovel Letter (2018) – Attorney-Client Privilege when Hiring a CPA?

When it comes to IRS Amnesty, confidentiality is absolutely crucial.

What is a Kovel Letter?

A Kovel Letter is used by attorneys/clients in situations in which the attorney and/or client must communicate with another non-attorney accountant such as a CPA or Enrolled Agent, but the Attorney wants to try to extend the privileged communications beyond the Attorney, and to the Tax/Accounting Professional.

What is an Attorney-Client Privilege?

The Attorney-Client Privilege is known as one of the strongest privileges that exists. The idea behind the attorney-client privilege is that for an attorney to best represent his or her client, it is important the client feels that information being provided to the attorney is confidential, so that the client can tell the “whole” story — without fear that the attorney may reveal the information at another time, and put the client’s freedom in jeopardy.

For example: In the area of IRS Voluntary Disclosure, we have clients who were willful, and/or unsure if they are willful or not.  When the client is telling us his or her story, it is important that the client feels comfortable enough to reveal sufficient information so that we can provide the best advice and guidance possible. 

What If There Was No Confidentiality…

If a client believes the information is not confidential, the client will be less inclined to provide the full story — and the meeting becomes about as awkward as your first date in 7th grade (you remember…Z Cavaricci’s, Timberlands and that cool Crystal Necklace hanging out of your turtleneck)…with the client doing his or her best to hope the Attorney does not judge him or her poorly.

In other words, once the truth unfolds — the prior legal advice becomes as ineffective and dated as your old wardrobe has become today.

Is there a CPA Privilege?

Generally, there is a limited privilege between a CPA and his or her client. That privilege is very limited, and does not extend to anything criminal related. Therefore, in the situation in which a person has communicated highly confidential information to the CPA, there are many instances in which the level of privilege is not sufficient to protect the confidential information.

The Purpose of A Kovel Letter

In order to bridge the the lack of confidentiality that exists between a client and a CPA, the Kovel letter was introduced as a result of the U.S. vs. Kovel. With a Kovel Letter, the Attorney retains the Accountant, not the client. And, the Accountant is retained by the firm for the specific matter and only to with respect to providing legal advice.

A Kovel Letter Has Limitations

Inexperienced IRS Voluntary Disclosure Program Lawyers want to try to turn the Kovel Letter into a magic wand, bestowing Attorney-Client privilege to an Accountant, CPA or EA for all the tax work (tax returns, etc.) the tax professional prepares — which is not how a Kovel Letter works. 

Just because an Attorney utilizes a 3rd party CPA or EA to perform tax services does not grant a blanket privilege to the CPA or EA for work performed that was not for the purpose of providing legal advice.

Under Kovel, the party asserting the privilege must establish that the communications or materials at issue were made for the purpose of obtaining legal advice from an attorney. [See also Schaeffler v. United States, 806 F.3d 34, 40 (2d Cir. 2015), stating that “the purpose of the communications must be solely for the obtaining or providing of legal advice,” emphasis added.]


If the communications/materials were made for the purpose of obtaining accounting services, or if the advice sought was really the accountant’s rather than the attorney’s, no privilege exists. Accordingly, to satisfy the Kovel test, Adlman had to establish that the memoranda at issue were rendered to increase his understanding of the tax code so he could provide legal advice to Sequa.


In United States v. Adlman, 68 F.3d 1495 (2d Cir. 1995), the Court of Appeals held, in part, that communications with an accounting firm were not privileged where “[t]here [was] virtually no contemporaneous documentation supporting the view that” the accounting firm was operating a legal capacity, rather than as a non-privileged accountant. Id. at 1500.


Kovel recognized a privilege derivative of the attorney-client privilege where a third party clarifies or facilitates communication between attorney and client in confidence ‘for the purpose of obtaining legal advice’ from the attorney. [Kovel, 296 F.2d] at 922. The caveat to the Kovel rule, however, is that the advice rendered must be that of the attorney, not the agent.” Gucci Am., Inc. v. Guess?, Inc., 271 F.R.D. 58, 70-71 (S.D.N.Y. 2010).


See also McNamee v. Clemens, 09 Civ. 1647 (SJ)(CLP), 2014 WL 6606661, at *2 (E.D.N.Y. Nov. 19, 2014) (“the ‘critical inquiry’ is whether the communication with the person assisting the lawyer was made in confidence and for the purpose of obtaining legal advice”) (citing Allied Irish Banks, P.L.C. v. Bank of Am., N.A., 252 F.R.D. 163, 168 (S.D.N.Y. 2008) (citations omitted)); Calvin Klein Trademark Trust v. Wachner, 198 F.R.D. 53, 44 (S.D.N.Y. 2000) (the privilege applies only where the third party “enabl[es] counsel to understand aspects of the client’s own communications that could not otherwise be appreciated.”)

Kovel Risk in IRS Offshore Disclosure

In IRS Offshore Disclosure, many firms are using CPAs, EAs and other Accountants improperly, and misrepresenting to clients that the communications to the CPA are protected. For example, if a firm retains a CPA for purposes of preparing Amended Returns, FBARS, or informational returns, and not to provide the lawyer with LEGAL advice, the Kovel would not be effective.

Kovel Is Even Riskier when the CPA Submits Directly to the IRS

For example, if an Attorney refers a client to a CPA to prepare a Reasonable Cause Letter, and the client provides confidential information to the CPA, the purposes of the CPA was not to provide the attorney legal advice, and the information the person provided to the CPA could be used against him or her.

This can put a client at great risk (and the Attorney), especially if the Attorney knew the client was willful, but referred him or her to a CPA to submit under Reasonable Cause — when the Attorney knew the client was willful.

*Learn more about the general risk of having inexperienced counsel recommend a willful person go Reasonable Cause or Streamlined.

Other Potentially Toxic Kovel Letter Situations

Accountant Continues Direct Representation with client

If your attorney retained an Accountant, for a specific matter, and for the purpose of the Attorney to provide related legal advice, but you continue using the CPA or EA on other matters — the Kovel Letter does not expand the attorney-client privilege to other matters, because that would defeat the purpose of the Kovel Letter.

In other words, the Kovel Letter does not provide a blanket Attorney-Client privilege between the Client and the CPA or EA.

Issuing Your Former CPA/EA a Kovel Letter

If you retain an attorney to handle the tax matter and your idea is to issue a Kovel letter to your prior CPA to suddenly magically create a retroactive attorney-client privilege…think again. You cannot suddenly create an attorney-client privilege for prior years when there was no privilege with the CPA, by having at new attorney issue the old CPA a Kovel letter.

Kovel is Not Statutory Law 

The Kovel letter is a creation of a Federal Court of Appeals holding and is not statutory law. Therefore, since it is not statutory law unless the facts are absolutely identical, other courts do not necessarily have to follow the same holding.  Thus, even if you meet most of the basic requirements that would appear necessary to obtain a letter, it is not a guarantee that the confidentiality will extend to the CPA.

Benefits of Using a Dual Attorney/EA or CPA

In order to best provide for protection regarding matters involving confidentiality, one of the best ways to achieve this goal is to utilize a tax attorney who is also an Enrolled Agent (EA) or CPA to handle the matter. That way, there are no third-party communications with other non-attorneys (other than agents of the dually licensed professional, which would then create and extended privilege) that could potentially lead to devastating results if for any reason the Kovel letter was not done properly, and/or if it is rejected.

While the Kovel letter may work sometimes, in limited situations, it is not bulletproof and you should consider the risk before retaining a tax attorney to handle a legal/tax matter for you.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.