Article on Benefits and Risks of Kovel Accountant, and Case on Topic (11/5/18)

I call readers attention to a very good succinct article on benefits and risk of using a Kovel accountant.:  Maintaining Privileges When Kovel Accountants Prepare Tax Returns by Evan Davis (Hochman, Salkin, Toscher & Perez Blog 10/29/18), here, which links to the article of that name in Tax Notes, here.  The author's bio is here.

On Kovel, I also offer readers the opinion in United States v. Adams, 2018 U.S. Dist. LEXIS 41165 (D. Minn. 2018), here.  (If the link is not working, please let me know at jack@tjtaxlaw.com or by posting a comment.,.  I cut and paste the relevant discussion (cleaned up, beginning on p. 2 of the opinion):

II. Murry LLC Communications 

Mr. Adams has invoked the attorney-client privilege over numerous communications between himself and accountants at Murry LLC, who were retained by his tax counsel under a so-called Kovel arrangement. See United States v. Kovel, 296 F.2d 918, 921–22 (2nd Cir. 1961) (holding that attorney-client privilege may apply to an individual’s communications with an accountant if the communications are “made in confidence for the purpose of obtaining legal advice from the lawyer”). The government raises three challenges to this assertion of privilege. First, the government argues that the protections provided under Kovel are not applicable to the individual communications before the Court for in camera review. Even if the protections of Kovel did apply, the government asserts that any protection was waived by Mr. Adams’s subsequent filing of amended tax returns. Finally, the government argues that the crime-fraud exception vitiates any claim of privilege. 

The Court has conducted an in camera review of the following Murry communications: In Camera Exhibits M, N, O, P, R, S, and T. For the reasons set forth below, the Court rejects the government’s challenge to the assertion of privilege regarding these documents. However, this Court’s decisions regarding the privileged nature of the specific documents at issue is expressly limited to these documents. The Court’s rulings should not be read to strengthen or weaken claims of privilege or discoverability as to other documents, evidence, or testimony as those issues are not now before the Court. 

A. Attorney-Client Privilege 

Federal common law governs questions of privilege in a criminal case such as this. The attorney-client privilege protects confidential communications between a client and an attorney that are made for the purpose of obtaining legal advice. The party asserting that a communication is protected by the attorney-client privilege has the burden to establish that it applies.  

B. Application of Kovel 

With respect to the government’s argument that the protections of Kovel do not apply to the Murry communications, the Court finds that Thomas Brever’s Declaration and Supplemental Declaration sufficiently demonstrate that the attorneyclient privilege extends to the documents at issue. In these declarations, Mr. Brever thoroughly explains how communications with Murry LLC and the information Mr. Adams provided to the accountants assisted in Mr. Brever’s provision of legal advice to his client regarding tax-related matters. This is sufficient to invoke the attorney-client privilege. See Kovel, 296 F.2d 921–22 (explaining that where an attorney retains an accountant to assist the lawyer in providing legal advice to a client concerning tax issues, the attorney-client privilege may extend to communications between the client and the accountant); see also United States v. Cote, 456 F.2d 142, 144 (8th Cir. 1972) (concluding that attorney-client privilege may apply where “the accountant’s aid to the lawyer preceded the advice and was an integral part of it”). The Court’s in camera review of the communications does not contradict Mr. Brever’s explanation. 

C. Waiver By Filing Amended Returns 

The Court also concludes that Mr. Adams’s subsequent filing of amended tax returns for 2008, 2009, and 2010 do not result in a waiver of the privilege as to the Murry communications submitted for in camera review. In Cote, after concluding that the privilege could apply to communications between a client and an accountant who is retained to assist an attorney in providing legal advice on tax matters, the Eighth Circuit reasoned as follows: 

Notwithstanding our recognition that the attorney-client privilege attached to the information contained in the accountant’s workpapers under the circumstances existing here, we find that by filing the amended returns the taxpayers communicated, at least in part, the substance of that information to the government, and they must now disclose the detail underlying the reported data.  

456 F.2d at 144. Too broad an application of the rule of waiver requiring unlimited disclosure by reason of filing an income tax return might tend to destroy the salutary purposes of the privilege which invite confidentiality between the attorney and his client. The Cote court distinguished between “workpapers [that] contain detail of unpublished expressions which are not part of the data revealed on the tax returns,” and other workpapers to which the rule of waiver would apply. Id. (emphasis in original). Here, Mr. Brever explains in his Supplemental Declaration that in responding to a subpoena from the government, he provided copies of files that contain data and
information that that was included on the amended returns for 2008–2010. However, he did not disclose information communicated by Mr. Adams in connection with requests for legal advice. Mr. Brever’s explanation distinguishes this case from Cote, where the accountant “testified that the information on his workpapers was later transcribed onto the amended returns which were filed by the taxpayers with the government,” thereby waiving the privilege. The Court cannot conclude on this record, which includes the Court’s in camera review, that Mr. Adams is claiming privilege over the underlying details for the data that was ultimately transmitted to the IRS when he filed amended returns. Instead, the record suggests that the information conveyed to the accountants at Murry LLC comprised the type of unpublished expressions that were not later revealed on the amended tax returns.

Using Kovel Experts to Protect the Attorney-Client Privilege and Work Product Privilege (4/27/13)

I draw readers attention to a recent excellent article on the use of "Kovel" experts in delivering legal services and protecting the attorney-client privilege and work product "privilege" for their work.  Sara E. Kropf and Julie Marie Blake, Protecting the Confidentiality of the Work of an 'Outsider' on the Defense Team Maximizing the Protections of the Attorney-Client Privilege and Work Product Doctrine, 37 Champion 26 (2013).  The article is available on the NACDL site here for members of NACDL.  The article is also available publicly on Sara Kropf's web site here.

I strongly recommend that readers interested in the subject read the article.

I offer below a cut and paste (footnotes omitted) of my less complete discussion from my Federal Tax Procedure book of the subject with reference to the attorney-client privilege, but the concepts should also apply to work product:

2. Protecting Information Developed in the Audit (Kovel). 

In delivering legal services, an attorney will often need the assistance of non-lawyers who will become privy to confidential information.  At its most basic level, non-attorney personnel in the lawyer’s firm – paralegals and other assistants, secretaries, etc. – will become privy to the information.  Disclosures of such information to these personnel will not constitute a waiver of any privileges that may otherwise apply.  Often, however, the attorney will find it helpful to engage personnel outside the firm.  For example, often in a tax engagement, an attorney will hire an outside accountant to assist the lawyer in delivering legal services to the client.  The lawyer may want the accountant to meet with the client and obtain information directly from the client, and cloak that information in the attorney-client privilege just as if the lawyer obtained it directly rather than through the accountant.  The traditional method by which that is done, at least in a tax practice, is through an arrangement whereby the lawyer engages the outside personnel – accountant in the present example – to become part of the team delivering legal services to the client.  

This procedure was approved early on in a case called United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).  The case is now shorthand for the concept.  The engagement for such legal related services is now commonly called a Kovel engagement, and the service provider is called a Kovel accountant or whatever is appropriate for the nature of the services.  Here, as in many areas of the law, it is imperative to do it and do it right.

IRS Noises About Attacking Kovel Arrangements

Tax controversy attorneys often engage accountants to assist them in providing legal services to a client of the attorney facings civil or criminal tax investigation. This arrangement is called a Kovel agreement, named after the leading case recognizing it -- United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). The IRS is now noising about testing the limits of the Kovel arrangement. An article in today's Tax Notes Today (Sam Young, Government Will Subpoena Accountants in Criminal Tax Prosecutions, Official Warns, 2010 TNT 91-4), although somewhat cryptic, seems to be consistent with the rumors we have heard in this regard. I should note, however, that, since this initiative -- if that is the right word for it -- is so fresh, there does not appear to be a definitive statement of the IRS's concern or its theories for avoiding a properly implemented Kovel arrangement. I suspect that the IRS will not be able to pierce a properly implemented Kovel arrangement, but I do suspect that there are arrangements under the guise of Kovel that exceed the limits of the construct on which Kovel is based. Readers wanting to pursue this matter further may click here for a more detailed discussion from the current update draft of my Tax Procedure book. Readers may also want to visit Phil Hodgen's excellent blog discussion of this same issue here.