Accountants only have “privileges” when they do lawyer-like things

Tax fraud has been at the center of the recent trial of two companies within the Trump Organization’s overall structure.

The case concerns benefits paid to Allen Weisselberg and another executive.

I want to focus on another aspect of this case. Namely, what role the CPA preparing the tax returns might have played and whether they might be forced to testify against the client.

My intention is to address an important issue in the professional relationship between a chartered accountant and a tax client. That is, to what extent “privileges” are attached to any communication between these parties.

First, realize that there is no accountant privilege as there can be for communications between an attorney and a client.

Beyond that clarity, things can get a bit muddled. CPAs are one of three parties referred to as “Federally Licensed Tax Practitioners.” I will call these people FATPs from now on.

FATPs are granted certain rights by the federal government, including the right to exercise federal tax laws.

A CPA can research federal tax law, evaluate the authorities, assess the facts, and come to a conclusion on how to apply the law. This is usually considered a legal practice.

Section 7525 of the federal tax code applies “privileges” to the things a FATP can do under federal law.

This legal privilege means that since the CPA can perform attorney-like work within the limits of federal tax law, the CPA can have privileged communications when doing these attorney-like things.

To have privileges, the communication must be: 1) between a FATP and a client; 2) for the purpose of tax advice; and 3) if the communication should be confidential.

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You do not have to be a FATP to file a tax return for employment. For this reason, communications related to the preparation of a tax return are not privileged.

FATPs have no right to represent clients in criminal matters, be it related to taxes or any other matter. Therefore, FATPs have no privilege in criminal cases.

Special rules apply to advice from FATPs when that advice promotes a tax benefit. Therefore, if the work promotes a tax break, FATPs have no privilege.

In summary, FATPs can only do attorney-like work in federal tax matters. An activity outside of federal tax matters is therefore not privileged.

If you engage me to prepare a tax memorandum for a proposed transaction, if handled properly, our communications can be privileged.

My memorandum requires me to do attorney-like work. Read tax authorities, interpret them and draw one or more conclusions. I am allowed to do this.

Things you tell me related to the preparation of your tax return are not privileged. I don’t have to be a FATP to do your tax returns, so my work is non-legal in that regard.

Trump’s CPA firm undoubtedly claims that it played no role in providing quasi-tax advice on what Mr. Weisselberg has admitted to as tax fraud.

Senate Treasury Chairman Ron Wyden asked the Trump Organization’s CPA firm 10 questions about their role in Weisselberg’s approved system and the organization’s tax returns.

The CPA firm is unlikely to be able to claim privileges for its client communications as the firm appears to say it was only involved in preparing the tax returns.

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CPAs can have privileges when acting on behalf of an attorney. A 61-year-old court decision allows CPAs to act like foreign language interpreters to help lawyers represent clients.

The privilege applies only when the CPA is hired by the attorney to assist the attorney in his or her legal work. The work of the CPA must be sent to the attorney. Invoices should also be sent to the solicitor.

The attorney must drive the bus with the CPA as a passenger. I went to CPA school. I taught at the CPA school. CPAs do not learn or teach privilege.

As advertised, I stayed at a Holiday Inn Express. That doesn’t mean I know privilege. If a CPA’s work in a criminal matter is to be privileged, let the attorney handle the details.

Jim Hamill is the head of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]

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