Why Accountants Should Not Provide Legal Advice – The Importance of Privilege in Tax Disputes

November 11, 2022 | Showing Gratitude in Business Kyle M. Brehm, Officer, Fredrikson & Byron, P.A., kbrehm@fredlaw.com

As a sales tax attorney, I’m often asked to help clients work through a number of complex issues. Whether examining sales tax positions taken by a targeted acquisition, determining whether a state imposes sales tax on the sale of a client’s products, or establishing which states require that the client collect tax…few of these issues are straightforward. Our practice also litigates tax disputes for our clients. Even more difficult than conducting the legal analysis above, is arguing our client’s position in court while also having to produce contradictory statements made by non-attorneys who the company previously engaged to look into the issue.

Q: What type of protection is available for the communications my company has had with tax advisors?

A: Any confidential communications made between your company and a tax attorney are protected by attorney-client privilege and do not need to be produced during discovery.

Q: You mentioned confidential communications with attorneys, but I also have confidential communications with my tax accounting firm – are those protected by privilege?

A: No. There is a difference between a confidential communication and an evidentiary privilege. Only privileged communications (i.e., confidential communications with your attorney) are protected by attorney client privilege.

Q: Then, what is confidentiality if it doesn’t protect that conversation with my tax accountant from production during discovery?

A: Confidentiality is a matter of ethics. An accounting or consulting firm has an ethical obligation to protect that confidentiality. But an ethical obligation of confidentiality is not an evidentiary privilege and will not protect you from required disclosure during discovery.

Q: Some states, like Texas, have an accountantclient privilege – isn’t that the same?

A: No. Specifically, the accountant-client privilege in Texas is non-evidentiary, which means if communications with an accountant are requested in discovery in Texas, you can be compelled to produce those communications. Moreover, the vast majority of states do not have an accountant-client privilege.

Q: That seems like a trap, but what is the worst that could happen?

A: Sales tax is interesting because whistleblowers file qui tam (False Claims Act) lawsuits against companies who collect too little tax while class actions are brought against companies collecting too much tax. Now, imagine what your defense looks like when you have to produce a conversation from your accountant notifying you of that potential risk.

Q: So, what do I do?

A: Hire tax lawyers, not accountants or consultants, to do legal analysis.