What Is Privileged and Confidential When It Comes to Tax Advice?

As the saying goes, “Two things in life are certain; death and taxes.” And while the similarities between death and taxes do not end there, understanding the latter can make it a lot less frightening than the former. One question worth asking is what are the rules when it comes to privileged conversations. Is what you share with your tax professional considered privileged and confidential? Do tax advisors have the same protections as tax lawyers?

The quick is answer is yes; some tax advisors do enjoy similar protections. However, the devil is in the details. Here is a brief discussion on everything you need to know about tax evasion, tax advisors, and privileged communications.

Confidentiality and tax planning

Communications between a taxpayer and the taxpayer’s tax advisor may include all kinds of sensitive issues, such as conversations about audit risk and audit defense strategies. The IRS has broad powers when it comes to requiring information from taxpayers, but it does have limits. It does not include the power to obtain privileged communications between a taxpayer and the taxpayer’s tax advisor. Such communications may be withheld from the IRS even in the face of an IRS subpoena. However, not all tax advisors receive this protection.

So, who can taxpayers trust with confidential information? The security of privileged communication applies only between the taxpayer and certain tax advisors, such as attorneys, enrolled agents, and CPAs. The table below summarizes who enjoys these special privileges.

Privileged & Confidential CommunicationsNo Privileged & Confidential Communications
CPAAll other tax and financial advisors
AttorneyRandom people
Enrolled Agents
Enrolled Actuaries

There is an important caveat to make here. Although CPAs, enrolled agents, and enrolled actuaries do enjoy special protections when it comes to IRS audits and subpoenas, they are not as broad as those of a lawyer. Lawyers have an attorney-client privilege that prevents them from being compelled to discuss communications with a client even when the client discussed criminal activity. However, the privileged communications protections of CPAs, enrolled agents, and enrolled actuaries do not extend to criminal or fraudulent tax matters. In other words, your communications with your non-attorney tax advisor are considered privileged and confidential if you are involved in tax avoidance but not if it is tax evasion.

Tax evasion vs. tax avoidance

At this stage, it is useful to make a difference tax evasion and tax avoidance. As mentioned above, privileged communication between your CPA or tax preparer will not protect you if you fall into criminal or fraudulent tax matters. The question is, “what is the difference between tax evasion and tax avoidance?”

“There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible… as taxes are enforced extractions, not voluntary contributions.” – Judge Learned Hand (1872-1961)

Judge Hand, the American judge and judicial philosopher, kindly provides a moral justification for our desire to minimize taxes, but there is a fine line between lawful tax avoidance and criminal tax evasion.

What is tax avoidance?

Tax avoidance is the legal right to minimize tax liability through legal methods. Examples of tax avoidance include minimizing taxes, deferring income recognition, tax debt settlements, and the acceleration of deductions.

What is tax evasion?

Tax evasion, on the other hand, is an intentional act to defy tax laws. Examples of tax evasion include claiming fictitious or improper deductions and understating your income. Your intent and the size of the “mistake” are also important factors to consider. Forgetting to declare a $200 signup bonus on a checking account is a mistake not tax evasion. “Forgetting” to report half your income is tax evasion.

In summary

The bottom line is you have every right to minimize your tax liability, but it’s smart to stay on the right side of the IRS. However, suppose you find yourself in a gray area between tax avoidance and tax evasion. In that case, you may want to keep your strategy conversations exclusively with tax attorneys and avoid tax advisors who can be compelled to provide evidence by an IRS subpoena.