Kovel Rule no Guarantee of Accounting Privacy in New York Audits and Investigations

In Why Your CPA Might Blab, by Arden Dale, the Wall Street Journal reports what your CPA knows could be subject to disclosure. As New York business lawyers know from experience, your accountant is not your attorney and he or she is not your priest.

Certainly when facing an audit or investigation, the first order of business is to consult an experienced New York business attorney to help protect your rights. As a decision we secured earlier this month illustrates (Salt Aire Trading LLC v. Enterprise Financial Services Corp.), communications involving your accountant may be privileged if assisting your law firm in your defense.

In that case, plaintiffs submitted to an in camera review of IRS audit documents for which attorney-client privilege was claimed. Plaintiffs claimed the documents were produced by plaintiffs’ attorneys and accountants for the purpose of legal advice. Defendants in the case contested attorney-client privilege. As the court noted, generally attorney-client privilege cannot be asserted in the presence of a third party, in this case the accountant. An exception would be if the accountant was facilitating attorney-client conversation, such as acting as an interpreter.
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The court found in this case that the accountant did act as a facilitator and that the plaintiffs met their burden of proof. Still, the court ruled portions of the documents not covered by attorney-client privilege must be disclosed.

As The Journal reports, the Internal Revenue Service is more often challenging attorney-client privilege when tax attorneys try to extend such protection to CPAs. Known as the Kovel Rule, such protections have been in place for half a century. However, the IRS and the courts continue to limit such protections.

Advocates warn taxpayers to beware a false sense of security. Conversations with your accountant are not automatically protected. In more and more cases, courts are taking a look at the extent to which the accountant’s work was done to facilitate the attorney-client privilege. Thus, having an attorney at the outset of such cases can be critical in both preparing a defense and determining whether the accountant’s work product will be subject to disclosure.

The Kovel Rule stems from the case of Louis Kovel, a former IRS agent who went to work for a tax law firm and was sent to prison in 1961 after refusing to answer grand jury questions about a client. The decision was ultimately overturned by an appeals court decision.

If you are facing investment or securities fraud, or other charges through the Securities and Exchange Commission, contact Malecki Law for a free consultation nationwide. Call 212-943-1233.