- 1 Kovel Letter and Attorney-Client Privilege when Hiring a CPA/Accountant
- 2 The Purpose of A Kovel Letter
- 3 What is an Attorney-Client Privilege?
- 4 Inexperienced Counsel Misuse Kovel and Put Client Confidentiality at Risk
- 5 What If There Was No Confidentiality?
- 6 Is there an Accountant/CPA Privilege?
- 7 Kovel is Not Statutory Law
- 8 A Kovel Letter Has Limitations
- 9 Using Kovel in IRS Offshore Disclosure
- 10 Golding & Golding: About Our International Tax Law Firm
Kovel Letter and Attorney-Client Privilege when Hiring a CPA/Accountant
The Kovel letter is one of the most misunderstood tools used in tax law and especially international tax law. The misuse of Kovel can lead taxpayers and their accountants into very precarious situations. Oftentimes, less experienced attorneys will try to sell clients on their services by offering the help of a CPA that either they retained (or retained by the client) — and claiming that the Attorney and CPA can work together to provide Tax Return preparation privilege equivalent to the attorney-client privilege.
This is absolutely incorrect.
In fact, it is also important to note that Kovel is not statutory law but rather case law — and Kovel can be rejected by courts depending on the specific facts and circumstances.
The Purpose of A Kovel Letter
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. The purpose of issuing a Kovel is to bridge the lack of confidentiality that exists between a client and a CPA on tax matters. 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 — even though these communications would have been privileged had they been made to the attorney instead of a CPA. Rather, Kovel is used so that the client can communicate with the CPA or accountant, and the accountant can help relay technical issues to the attorney — not the other way around.
What is an Attorney-Client Privilege?
The Attorney-Client Privilege protects client confidentiality between an attorney and client. The idea behind the attorney-client privilege is that for an attorney to best represent their 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 their 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. If these discussions were made with a CPA (even if your attorney referred you), they are not protected under the attorney-client privilege.
Inexperienced Counsel Misuse Kovel and Put Client Confidentiality at Risk
We do not know of any experienced offshore disclosure lawyers who refer tax preparation for VDP, Streamlined or Reasonable Cause submissions to outside CPAs using Kovel since it inherently puts the attorney-client privilege and client confidentiality at great risk. It is primarily a practice used by inexperienced counsel in order to perpetuate the “artificially low up-front hourly retainer scam” that then leads to an Attorney/CPA fee bait-and-switch. These attorneys send blanket referrals to outside CPAs and Accountants for tax preparation under the false pretense of having a Kovel letter protection for tax preparation — even though tax preparation is explicitly excluded under Kovel — in order to pad their fees.
In fact, some lesser experienced attorneys go so far as to submit willful clients to the streamlined program by convincing them their willful and intentional tax violations are minor (there is no de minimis rule exception for willfulness). This is despite the fact that the taxpayer understood and acknowledged their own willfulness. The Taxpayer is then lured into falsely certifying non-willfulness under penalty and perjury — which can then result in willful penalties and a criminal investigation.
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.
The client may feel ashamed and may only provide information that they think is relevant, instead of feeling confident in providing the full story.
Is there an Accountant/CPA Privilege?
Generally, there is a limited privilege between an Accountant/CPA and their client. The accountant privilege is very limited and does not extend to anything criminal-related. Therefore, in a 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.
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. Even if you meet most of the basic requirements that would appear necessary to obtain a letter, it is not a guarantee that confidentiality will extend to the accountant.
A Kovel Letter Has Limitations
Just because an Attorney utilizes a 3rd party Accountant to perform tax services and issues a Kovel Letter does not grant a blanket attorney-client privilege.
The protection (presuming it is not rejected by the court) is very limited:
As provided by Kovel:
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 or 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.”)
What Does this Mean?
It means Kovel does not provide confidentiality between the taxpayer and CPA on issues involving tax preparation. That is not the purpose of the Kovel. Rather, the purpose of the Kovel is for an Attorney to better understand the tax code. If anything, Kovel is used by non-tax attorneys, because non-tax attorneys may require an accountant to help them better understand the tax code — in order to prepare their case. With offshore disclosure, you are hiring a tax attorney specialist to represent you in a complex tax and legal matter, which is why Kovel is inapplicable. Stated another way, if your offshore disclosure tax attorney requires a CPA or accountant to help them better understand the tax code — you need a new tax attorney.
Using Kovel in IRS Offshore Disclosure
In offshore disclosure, Kovel is used on rare occasions, 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 legal 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.
Contact our firm today for assistance with getting compliant.