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
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.
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