The IRS was investigating tax preparer Isana Radchik’s clients for tax related matters, including a potential failure to file foreign financial bank account reports and whether the proper amounts of federal tax liabilities. In the case of United States v. Radchik, USDC NJ, Case No. 2:17-cv-01187, the question before the Court was whether the preparer could be required to respond to an IRS summons for information related to her work.

The taxpayer claimed two reasons why should not be required to respond to the IRS’s summons:

Under §7525 the information in question was protected by the tax practitioner privilege and
She asserted her own fifth amendment right against self-incrimination.

IRC §7525 provides for a limited privilege available to “federally authorized tax practitioner” (FATP). An FATP is any individual authorized to practice before the IRS under the provisions found in Circular 230—generally attorneys, CPAs and EAs. If the individual is an FATP, the privilege is defined at §7525(a) as:

(a) Uniform application to taxpayer communications with federally authorized practitioners

(1) General rule

With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a 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.

(2) Limitations

Paragraph (1) may only be asserted in--

(A) any noncriminal tax matter before the Internal Revenue Service; and

(B) any noncriminal tax proceeding in Federal court brought by or against the United States.

A key factor to note is that the privilege is restricted to “tax advice” and is also no broader than what would exist for an attorney. Information obtained in the preparation of a tax return is generally not protected. As the opinion notes:

The Section 7525 privilege “is no broader than the attorney-client privilege.” Trenk, 2009 WL 485375, at *4. As a result, several district courts, including the District of New Jersey, have found that “[t]he privilege does not protect communications between a tax practitioner and a client simply for the preparation of a tax return.” Trenk, 2009 WL 485375, at *4; United States v. KPMG LLP, 316 F. Supp. 2d 30, 35 (D.D.C. 2004); Chao v. Koresko, 2005 WL 2521886 (3d Cir. Oct. 12, 2005); see also United States v. Arthur Andersen, L.L.P., 273 F. Supp. 2d 955, 957-58 (N.D. Ill. 2003), amended on reconsideration sub nom. United States v. Arthur Andersen, LLP, No. 02-6790, 2003 WL 21956404 (N.D. Ill. Aug. 15, 2003) (stating “[c]onfidentiality in the tax context may be waived when the communications with the tax adviser ultimately are used to prepare the client’s tax returns, a non-confidential document.”)

The tax adviser needs to establish that there was communication for the purpose of obtaining tax advice for any communications alleged to be protected. As the opinion continues:

Courts analyze this burden applying the same framework as in the attorney-client privilege context: “a client seeking tax advice must obtain that advice from a tax professional acting as such, and in a manner indicating that those communications will be kept in confidence.” Arthur Anderson, L.L.P., 273 F. Supp. 2d, at 957-58; see also Valero Energy Corp. v. United States, No. 06-6730, 2008 WL 4104368, at *4 (N.D. Ill. Aug. 26, 2008), aff’d, 569 F.3d 626 (7th Cir. 2009) (protected “communication[s] must be made for the purpose of obtaining tax advice from a federally authorized tax practitioner.”) Tax advice is defined within the statute as “advice given by an individual with respect to a matter which is within the scope of the individual’s authority to practice.” 26 U.S.C.A. § 7525; see also Wells Fargo & Co. v. United States, No. 09-2764, 2014 WL 2855417, at *6 (D. Minn. June 16, 2014). This does not include “[c]ommunications made primarily to assist in implementing a business transaction,” but it may include a discussion of “legal tax strategy consequences,” “interpretation of a partnership agreement,” a “draft valuation” of a company, or “tax planning advice”. United States v. Microsoft Corp., No. 15-102, 2017 WL 1788411, at *3 (W.D. Wash. May 5, 2017); Pasadena Ref. Sys. Inc. v. United States, No. 10-0785, 2011 WL 1938133, at *3 (N.D. Tex. Apr. 26, 2011), report and recommendation adopted, No. 10-785, 2011 WL 1960555 (N.D. Tex. May 19, 2011); United States v. BDO Seidman, LLP, No. 02-4822, 2003 WL 932365, at *2 (N.D. Ill. Feb. 5, 2003), aff’d sub nom. United States v. BDO Seidman, 337 F.3d 802 (7th Cir. 2003).

While the Court noted that the IRS was in error when it claimed that the taxpayers had to affirmatively assert the privilege before it could be invoked, the Court found that the preparer had failed to show that what was being asked for fell within such privileged communications with her client.

Many of the questions she objected had no obvious connection to tax advice, nor had she ever shown that she had been requested to provide tax advice as distinct from return preparation. The opinion notes:

The difficulty is Ms. Radchik has made no showing that she performed any work for the Bernshteyns beyond tax preparation. To date she has asserted that she prepared the Bernshteyns taxes, but not mentioned any tax advice she gave or circumstances surrounding advice she may have given. Absent Ms. Radchik giving tax advice and the government calling on her to divulge the advice, Ms. Radchik cannot assert the tax practitioner privilege.

Now the Court moved on to the second issue—that of a claim of fifth amendment protection against having to provide this information to the IRS. Note that the fact that information might subject her clients to criminal prosecution is not sufficient to invoke the privilege. The Court notes:

Only the person to whom the privilege applies can claim the privilege. For example, it is not sufficient for Ms. Radchik to claim that she would be incriminating her clients’ because the “privilege was never intended to permit (a person) to plead the fact that some third person might be incriminated by his testimony.” Matter of Grand Jury Empanelled, 603 F.2d at 472 (internal citations omitted).

As well, a mere vague, unsubstantiated belief that the information might lead to criminal prosecution is not sufficient. The Court continues:

Additionally, the person invoking the privilege “must provide more than mere speculative, generalized allegations of possible tax-related prosecution,” there must be “substantial and real hazards of self-incrimination.” Id. at 705; see also United States v. Marra, No. 05-2509, 2005 WL 2474873, at *8 (D.N.J. Oct. 5, 2005)

The IRS argued that she could have no such reasonable fear of prosecution because even if she had committed some criminal offense, the statute for charging her with the crime had expired and there was no ongoing investigation of the preparer:

It is the Government’s position that to assert the privilege against self-incrimination, Ms. Radchik must make a showing of a real and substantial hazard that might result by disclosing the information. (Tr. at 3.) According to the Government, no such threat exists because it is time barred from indicting Ms. Radchik and there is no current investigation of Ms. Radchik. The Government is “not delaying recommendation for a criminal investigation in order to gather more information,” rather there is simply “no DOJ referral” according to Government attorney Nelson Wagner. (Tr. at 4.)

The Court found that, again, the preparer had failed to show evidence the privilege should apply:

At this point there is no indication that criminal charges will be brought against Ms. Radchick. The investigation is being conducted by an IRS Agent for the purpose of assessing penalties for unpaid taxes. Ms. Radchick needs to point to some concrete evidence that she has a “real and substantial” concern regarding criminal prosecution. Stating her fear alone is not sufficient. The Court needs more than her “say-so” to appropriately apply fifth amendment protections. There must be a showing that Ms. Radchik’s answers to the Government’s questions would furnish the necessary link to prosecute Ms. Radchick under one of the statutes she mentions. Nothing in Respondent’s Opposition to the Order to Show Cause, supplemental brief, or in-camera testimony substantiates her alleged fear of prosecution. Without more, this Court cannot afford Ms. Radchick protection under the fifth amendment.

In this case the Court was dealing with her assertion that she could avoid answering any IRS questions based on either or both privileges. The Court did note that if a specific inquiry the IRS made raised issues regarding either privilege she could raise that issue (and presumably end back up in Court)—but she had to subject herself to an IRS interview.

It is important to understand just how limited the practitioner privilege is—the vast majority of communications most readers are involved in will not be protected simply because it most often was obtained in the process of preparing a return. And even when it does relate to advice, the privilege still fails if the matter rises to a criminal level or the matter is not a tax matter before the federal courts.

Similarly, it’s important to remember that the fifth amendment won’t allow a preparer to keep from disclosing information just because it could incriminate a client.

Most non-attorney advisers have not had any serious training regarding how privilege works and how it may be destroyed—and given the porous nature of what privilege is created by IRC §7525 (no criminal matters and no protection for non-tax litigation) if it appears information is about to be revealed that needs to be privileged, competent legal counsel should be sought before the adviser gets the details that might have to later be revealed