An attorney who represents a client in a criminal tax investigation will typically retain a forensic accountant to review and analyze the client’s financial records and tax returns mirroring the work of the IRS criminal investigators. The accountant is generally referred to as a “Kovel Accountant” and is hired by the attorney, not the client, so that the accountant’s work is protected by the attorney-client privilege.
The name Kovel Accountant comes from the case Kovel v. United States (HERE) in which the United States Second Circuit Court of Appeals held that the attorney-client privilege applies to communications between a law firm’s client and an accountant, hired by the law firm to assist in a criminal tax investigation. Kovel, the accountant hired by the law firm, refused to answer questions by a grand jury investigating the client for tax fraud and was held in contempt. Kovel appealed to the Second Circuit which held that the attorney-client privilege may apply to the accountant, if the communications were for seeking legal advice.
It is very important for the attorney to retain a “clean” accountant who had no prior relationship with the client, as the Kovel Accountant. Although IRC Section 7525 added a statutory “tax preparation” privilege in 1998, it is inapplicable to criminal tax cases. This makes it very difficult, if not impossible, for the attorney to retain any accountant who had a prior professional relationship with the client, such as, preparing and filing tax returns, auditing books and records or representing the client in a civil tax matter. An accountant who had a prior professional relationship with the client, could be a witness in the investigation or even a target of the investigation.
Criminal tax investigations can be ongoing for months or even years and the client may be required to file a current year tax return during the investigation. The Kovel Accountant cannot prepare and file the current tax return because communications regarding the preparation and filing of tax returns is not protected by any privilege in a criminal tax investigation. Maintaining the attorney-client privilege is important in any matter, but particularly in a criminal tax investigation, and therefore maintaining the formalities of the Kovel Accountant is necessary. Failure to do so may allow the government to pierce the privilege and obtain testimony from the Kovel Accountant. It is further worth mentioning that the prior accountant, who may be a witness in the investigation, cannot prepare the current year tax return. A new accountant, having no relationship to the investigation or the client, should be retained.
Any accountant who becomes aware that a client is either the subject of a criminal investigation or could become the subject of a criminal investigation should immediately refer the client to a criminal tax attorney and avoid further communication with the client. For example, if a client notifies an accountant that the client has been hiding money offshore, the accountant should immediately cease all communications and refer the client to a criminal tax attorney.
If you have any questions related to this blog post or any other civil tax or criminal tax-related matter, please feel free to contact me at (214) 749-2456 or at firstname.lastname@example.org.