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

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

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

A Kovel letter is used in very-limited situations, in which an attorney wants to try to extend the attorney-client privilege on matters involving highly-complex accounting/tax situations only.

A Kovel Letter is not statutory law, and can be rejected by courts.

The Purpose of A Kovel Letter

The purpose of issuing a Kovel, is 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.

Kovel does not provide confidentiality in routine tax matters — such as when an accountant prepares tax returns.

There is a correct way to issue a Kovel Letter, and an incorrect way to issue a Kovel Letter. Unfortunately, the incorrect way can have serious repercussions on client confidentiality.

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 Offshore & 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.

A Kovel Letter Has Limitations

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 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 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.

Offshore Disclosure & Kovel  (The Problem)

At Golding & Golding, we specialize exclusively in IRS Offshore & Voluntary Disclosure — so we will refer to Offshore Disclosure as an example.

Oftentimes, we inherit cases from less-experienced lawyers who significantly overstated their experience in Offshore Disclosure matters to the client — and referred the case to an outside CPA for tax preparation under the false pretense of Kovel.

They send the client to a CPA, and the client and CPA then end up engaging in legal discussions about the case, as is human nature.

These discussions are not privileged, BUT they would have been privileged had the attorney not referred the matter to an outside CPA or accountant.

Using Kovel in IRS Offshore Disclosure

In offshore disclosure, Kovel is used on the rare occasion when the applicant has an extremely complex foreign accounting matter involving foreign businesses. This will usually involve a comprehensive, multi-faceted disclosure involving several countries and jurisdictions, foreign tax credit reconciliation for business related issues, BEPS, Transfer Pricing and other accounting issues — and tens of millions of dollars worth of assets, investments, accounts and income.

In this type of situation, accountant(s) and/or forensic accountants are retained to assist with foreign and U.S. tax reconciliation matters in a multi-jurisdictional disclosure.

Absent these highly-complex accounting/tax issues the entire submission (tax, legal, and audit/examination defense) is best handled by a tax specialist and the in-house tax and lawyer team.

This minimizes the risk of jeopardizing attorney-client privilege and confidentiality.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

We Can Help

No matter where in the world you reside, our international tax team can get you IRS offshore compliant.

Golding & Golding specializes in offshore tax and reporting amnesty. Contact our firm today for assistance with getting compliant.