Accounting Documents Protected by the Work Product Doctrine and the Kovel Doctrine

The work product doctrine generally protects “documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative.[1]“ [T]o qualify for protection against discovery under Rule 26(b)(3), documents must have two characteristics:

·       they must be prepared in anticipation of litigation or for trial, and

·       they must be prepared by or for another party or by or for that other party's representative.[2] 

Only work product created in anticipation of litigation qualifies for protection under the work product doctrine. In the case of a tax controversy, the simultaneous nature of the IRS's examination and the taxpayer’s ongoing tax and legal obligations presents a challenge in determining whether the taxpayer or their representatives created a document in anticipation of litigation. Under the right circumstances, a party may create work product during the course of an IRS investigation in anticipation of litigation[3].  In contrast, documents that would have been prepared for a party's tax filings regardless of the IRS examination would not qualify as work product[4]. Consequently a court must examine the underlying facts to determine when the party claiming work product protection reasonably anticipated litigation and the nature of the document's purpose.

Under IRC §7525(a)(1) the common law protections of confidentiality applies to a communication between a taxpayer and an attorney with respect to tax advice. The same common law protections of confidentiality applies to a communication between a taxpayer and an attorney and communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. Generally, the privilege does not apply to communications regarding the preparation of tax returns[5].

In U.S. v. Burga, 124 AFTR 2d 2019-XXXX, (DC CA), 08/16/2019 the district court held that some documents created by an accountant were protected under the tax practitioner privilege and under the holding in Kovel because the documents were produced to help an attorney to give legal advice, not merely to produce a tax return.

The Court of Appeals for the Second Circuit previously held that attorney-client privilege also applies to communications made in the presence of an accountant who is indispensable to the consultation between lawyer and client. The court held that the privilege attached to a communication made to the attorney, in the presence of an accountant employed by the attorney, if the communication was made in confidence for the purpose of getting legal advice from the lawyer[6].

The tax practitioner privilege does not protect communications made in the presence of an accountant if the accountant is there merely to provide accounting services[7].

In Burda the attorney hired an accountant to, according to statements the accountant submitted to the district court, "review and, if necessary and/or possible, amend" the tax returns that the IRS was examining, as well as "prepare returns for" future years. The accountant also said, that he "performed services which were of a character and quality necessary for the [attorney] to provide appropriate and accurate legal and tax advice to [Burga] including reviewing and interpreting tax and financial information and documents."

The IRS asked Burga to produce documents that the accountant had prepared. Burga said the documents were protected under IRC §7425 and by the Kovel doctrine.

The IRS said the documents were not protected because the accountant was merely providing accounting services, i.e., he was preparing tax returns.

The district court held that IRC §7425 and Kovel did apply to protect some of the documents that the accountant produced. The court also recognized that some of the accountant's documents were merely related to his preparing tax returns and were not protected.

The court found that the accountant's statement that he was hired to prepare tax returns did not preclude the possibly that he also provided tax advice. The court looked to his statement as evidence that he may have provided tax advice in addition to preparing tax returns. The court found that this statement was enough to have both IRC §7425 and Kovel apply.

The court ultimately decided to appoint a special master review the documents to determine which ones were protected because they contained tax advice provided by the accountant and which ones were merely related to preparing tax returns.

Practice Pointer: The practical point is that in any tax controversy if an accountant is going to be retained as part of the client representation, protecting the work product of the accountant is critical. Clearly any written documents or communications must be kept separate and labeled as “property of the attorney [name]“ and those reflecting tax preparation must be kept separate so as to not destroy the privilege.

---

[1] Fed. R. Civ. P. 26(b)(3)(A).

[2] In re California Pub. Utils. Comm'n, 892 F.2d 778, 780–81 (9th Cir.1989).

[3] United States v. Roxworthy, 457 F.3d 590, 594–600 [98 AFTR 2d 2006-5964] (6th Cir. 2006).

[4] See United States v. Richey, 632 F.3d 559, 568 [107 AFTR 2d 2011-573] (9th Cir. 2011).

[5] U.S. v. McEliogt, 115 AFTR 2d 2015-1433 (DC CA 2015).

[6] U.S. v. Koval, 9 AFTR 2d 366, 296 F.2d 918 (2^nd Cir. 1961).

[7] Gonzales v. U.S., 110 AFTR 2d 2012-6083 (9^th Cir. 2012).

IRS Approves spousal rollover although decedent’s IRA did not designate a beneficiary

Generally, a surviving spouse may make a tax-free spousal rollover from a deceased spouse's IRA only if the survivor is designated as the IRA’s beneficiary. However, in PLR 201931006, IRS said this general rule did not apply—and a tax-free spousal rollover was approved where the decedent failed to designate an IRA beneficiary, died without a will, and the surviving spouse was the administrator and sole heir to the decedent’s estate. 

A surviving spouse designated as the beneficiary of an IRA need not leave the IRA in the decedent's name. The surviving spouse can either:

·       roll over the decedent's IRA into an IRA in the spouse's name; or

·       elect to treat the decedent's IRA as the spouse's own IRA. 

However, the regulations state the election to treat the decedent's IRA as the surviving spouse beneficiary's IRA is available only if the spouse is “the sole beneficiary” of the IRA and has an unlimited right to withdraw amounts from it. Note the sole beneficiary requirement is not met if a trust is named as the IRA's beneficiary, even if the spouse is the sole beneficiary of the trust (but see PLR 201923002).

There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan, annuity, or tax-sheltered annuity. For a rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to an IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). An individual is permitted to make only one nontaxable 60-day rollover between IRAs in any 1-year period.

In PLR 201931006 the Decedent established an IRA but failed to designate a beneficiary for the account. The IRA was maintained by a custodian that provided that if no beneficiary is designated for the IRA, the account balance remaining at the decedent’s death would be payable to her estate. The decedent died without a will and, under relevant state law, the decedent’s surviving spouse was the sole heir to the estate. The decedent’s surviving spouse was also the sole administrator of the estate.

The decedent’s surviving spouse intended to distribute the IRA to the estate, and as administrator of the estate, pay the proceeds of the IRA to himself. Within 60 days of receipt, he would roll over the proceeds of the IRA into one or more IRAs in his name.

The surviving spouses asked IRS to rule that:

·       the surviving spouse be treated as the payee or distributee of the IRA proceeds;

·       The IRA would not be treated as an inherited IRA; and

·       He will be eligible to do a tax-free 60-day rollover from the decedent’s IRA to his own IRA. 

The ruling points out that the surviving spouse would not be permitted to treat the IRA as his own, because he was not named the beneficiary of the IRA. However, because he was the administrator and sole heir to the estate he was effectively the individual for whose benefit the account was maintained. As a result, if the surviving spouse receives a distribution of the proceeds of the IRA, he could roll over the distribution into his own IRA.

In response to the ruling requests, IRS concluded that:

·       The surviving spouse will be treated as the payee or distributee of the proceeds from the IRA;

·       that the IRA would not be treated as an inherited IRA; and

·       That the surviving spouse will be eligible to make a tax-free rollover of the proceeds from the decedent’s IRA to an IRA set up and maintained in his own name, as long as the rollover occurred no later than 60 days after the proceeds were received by the surviving spouse in his capacity as administrator of the estate, and all other applicable requirements were satisfied.

In this case the surviving spouse was “lucky” in that he was the sole heir of the estate and the state statue was favorable.  In many case where clients are doing their estate planning the non-probate assets are overlooked.  Non-probate assets do not pass through the will; they pass by beneficiary designation. Therefore it is incumbent when doing your estate plan that you confirm that you have properly designated the beneficiaries of your retirement accounts, IRA’s etc., your life insurance, annuities, and other non-probate assets

IRS explains revocation of passports of taxpayers with significant debt

With the summer in full swing with taxpayers traveling to foreign destinations, the IRS in IR 2019-1451, 8/8/19  has reminded taxpayers that they may not be able to renew their current passport, or obtain a new passport, if they are delinquent in paying federal taxes.

In 2015 Congress enacted “The Fixing America's Surface Transportation (FAST) Act” and added a new Code section, IRC §7345.  Under IRC §7345, taxpayers having a "seriously delinquent tax debt" is, unless an exception applies, grounds for denial, revocation, or limitation of a passport.

A seriously delinquent tax debt is generally an assessed tax debt that exceeds $50,000 (adjusted for inflation for calendar years beginning after 2016; currently $52,000) and for which a notice of lien has been filed under IRC §6323).  Under IRC §7345(b)(2), a seriously delinquent tax debt does not include a debt for which: there is an agreement in place to repay the debt under IRC §6159 or IRC §7122; or collection is suspended because of a collection due process hearing under IRC §6330 or because innocent spouse relief under IRC §6015(b), (c) or (f) is requested or pending.

In addition, IRC §7508(a)(3) provides that certification of a seriously delinquent tax debt under IRC §7345will be postponed while an individual is serving in an area designated as a combat zone or participating in a contingency operation.

In February 2019, IRS issued IR 2019-23, which provided that when a taxpayer no longer has a seriously delinquent tax debt, because he paid it in full or made another payment arrangement, IRS will reverse the taxpayer's certification within thirty days. It also provided steps taxpayers can take to avoid having IRS notify State and circumstances under which IRS will not issue certifications to State.

The Information Release lists circumstances under which IRS may ask State to exercise its authority to revoke a taxpayer's passport. For example, IRS may recommend revocation if IRS had reversed a taxpayer's certification because of his promise to pay, and he failed to pay. IRS may also ask State to revoke a passport if the taxpayer could use offshore activities or interests to resolve his debt but chooses not to.

Before contacting State about revoking a taxpayer's passport, IRS will send Letter 6152, Notice of Intent to Request U.S. Department of State Revoke Your Passport, to the taxpayer to let him know what IRS intends to do and give him another opportunity to resolve his debts. Taxpayers must call IRS within 30 days from the date of the letter. Generally, IRS will not recommend revoking a taxpayer's passport if the taxpayer is making a good-faith attempt to resolve his tax debts.

The IRS can help taxpayers resolve their tax issues and expedite reversal of their certification to State. When expedited, IRS can generally shorten the 30 days processing time by 14 to 21 days. For expedited reversal of their certification, taxpayers will need to inform IRS that they have travel scheduled within 45 days or that they live abroad.

For expedited treatment, taxpayers must provide the following documents to IRS:

·                 Proof of travel. This can be a flight itinerary, hotel reservation, cruise ticket, international car insurance, or other document showing location and approximate date of travel or time-sensitive need for a passport.

·                 Copy of letter from State denying their passport application or revoking their passport. State has sole authority to issue, limit, deny, or revoke a passport.

The Information Release also repeats the information from IR 2019-23 regarding steps taxpayers can take to avoid having IRS notify State and circumstances under which IRS will not issue certifications to State.