Tax Practice and Privilege: A Tale of Two Countries

Abstract:     
A comparison of the British Morgan Grenfells case with the American KPMG case suggests that tax practitioner privileges are doing well in the UK and poorly in the US. In the UK, conflicts are few, and the privilege is viewed as a fundamental human right. The US, by contrast, is experiencing multi-layered conflicts - between lawyers and accountants, and between IRS and tax shelter promoters. The privilege here is a battle trophy, and is bound to be weakened by the fighting.

In Morgan Grenfells, the issue was whether Parliament had abrogated the legal professional privilege (LPP) in a tax statute. Pursuant to the principle of legality, Parliament can abrogate fundamental human rights only if it does so directly, or by necessary implication. Inland Revenue argued that, in protecting the LPP in certain narrow, specific instances, it followed by necessary implication that Parliament had intended to abrogate it in all other cases. Two lower courts agreed. The House of Lords, however, reversed, in a ringing reaffirmation of the LPP as a fundamental human right.

In KPMG, the court considered the tax practitioner privilege, IRC Sec. 7525. The statute provides that a communication with an accountant is privileged "to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney." As interpreted by the KPMG court, that means that there is no privilege for materials supporting a tax return, and there is no privilege for business advice, as opposed to legal advice. Accountants couldn't possibly be giving legal advice, for, if they were, they would violate the unauthorized practice rules. Therefore, the tax advice given by accountants can't be privileged. Even worse, if tax advice given by accountants is not privileged, then the same tax advice given by lawyers is not privileged either. IRS, which considers itself to be "at war" against tax shelters, will not hesitate to use this argument aggressively. So much for the tax practitioner privilege.

Keywords: Taxation, Privilege, Professional Responsibility

JEL Classifications: K34, K41

Accepted Paper Series