Attorney Privilege and the Kovel Arrangement in 30 Minutes

Welcome to Specialist CLE. I'm Thomas Ogden, a Certified Specialist in Taxation Law and Appellate Law with the State Bar of California. This is Attorney Privilege and the Kovel Arrangement, Part 1. It is a 30-minute self-study activity in two parts, approved for 0.5 hour of MCLE credit through provider number 19437 and structured for 0.5 hour of continuing education for California CPAs. It is educational content, not legal or tax advice.

By the end of both parts you should be able to do three things: contrast the attorney-client privilege with the practitioner privilege in Internal Revenue Code section 7525; identify when a Kovel arrangement is appropriate; and structure an engagement so that the privilege is preserved.

Start with the attorney-client privilege itself. It protects confidential communications between a client and a lawyer made for the purpose of obtaining legal advice. Three words in that sentence do the work: confidential, lawyer, and legal advice. Tax return preparation is generally not legal advice, which is why a return preparer's file is usually discoverable, and why the same document can be privileged in a lawyer's hands and not in an accountant's.

Section 7525, enacted in 1998, extends a similar protection to communications with federally authorized tax practitioners, which includes CPAs and enrolled agents. But it is narrower in two ways that matter in practice. First, it applies only in noncriminal tax matters before the IRS and in noncriminal tax proceedings in federal court. The moment a matter becomes criminal, the 7525 privilege is gone. Second, it does not cover written communications in connection with the promotion of a tax shelter. So the practitioner privilege is real, but it is a fair-weather privilege, and the weather changes exactly when a client most needs protection.

That is the gap the Kovel arrangement was built to fill, and that is where we pick up in Part 2.

This is Attorney Privilege and the Kovel Arrangement, Part 2.

United States v. Kovel, decided by the Second Circuit in 1961, held that when an attorney retains an accountant to help the attorney render legal advice, the accountant's work falls within the attorney-client privilege, the same way an interpreter's would. The accountant is the lawyer's agent, translating financial facts into a form the lawyer can use.

Three elements have to be present. The engagement runs from the attorney to the accountant, not from the taxpayer to the accountant. The accountant's work must be in aid of the attorney's legal advice, which means the attorney directs the tasks. And the arrangement has to be documented before the work begins: a written engagement letter between attorney and accountant, with the accountant's work papers kept in the attorney's file.

The most common way a Kovel arrangement fails is when the same accountant prepares and signs the return. Return preparation is not legal advice, and courts have treated it as outside the arrangement, which can waive privilege over work the accountant did for the lawyer. The safe structure uses one accountant under Kovel and a different one for compliance.

Why this matters for the CPAs watching: if a client's civil examination has any chance of a criminal referral, the section 7525 privilege will not protect your communications once that referral happens. Getting counsel involved early, with a Kovel engagement in place, is how the analytical work you would do anyway becomes privileged.

That completes the activity. To receive your certificate, register on this page; CPAs will answer six review questions and a short final exam. Thank you for watching.