Voluntary Disclosure Process: Privilege and Kovel Agreements Protect Taxpayers and Accountants

by

Kevin Thorn

Accounting firms and other tax professionals should seriously consider working under the guidance of an attorney when filing voluntary disclosures of previously undisclosed offshore accounts, or risk being forced to testify against their clients or facing criminal contempt charges. Accountants, tax agents, and other tax practitioners who have filed voluntary disclosures without the assistance of legal counsel have done so at their and their clients risk and expense. However, by working with an attorney under a Kovel agreement, accountants and their clients are protected by the attorney-client privilege.

The benefits of the Kovel arrangement have reemerged due to the Offshore Settlement Initiative Voluntary Disclosure Program . As a result of this Initiative, some 14,700 taxpayers with previously undisclosed offshore accounts have come forward to the Internal Revenue Service. However, this process is very sensitive and exposes taxpayers to potential criminal prosecution. Many accounting firms are doing their clients and their business a disservice, attempting to complete voluntary disclosures on their own without the assistance of counsel without the protection provided by the Kovel agreements extension of the attorney client privilege. This exposes both the accounting firm and the taxpayer to needless liability.

No accountant wants to have to testify against his or her client or be held in contempt of court for refusing to testify. Unfortunately, without the assistance of counsel this is a very real possibility. A taxpayers sensitive information is necessarily revealed in the course of the business relationship with an accountant, and could reveal potential criminal culpability to the taxpayers accountant. If the taxpayers accountant is subpoenaed by the Federal government, there is nothing to prevent the accountant from having to testify in court against his client. If an accountant refuses to testify, he or she could be held in contempt of court and subject to incarceration. Working with an attorney under a Kovel letter agreement is the safest way for accountants to shield themselves from this Catch-22.

The Kovel arrangement is established by a formal letter from a taxpayers attorney to the taxpayers accounting firm designating the accountant as an agent of the attorney. This serves to extend the attorney-client privilege to the accounting firm. The Kovel arrangement is named after a case out of the Second Circuit Court of Appeals, United States v. Kovel. In Kovel,the court held that the attorney-client privilege extends to accountants reviewing documents and working as the attorneys agent.

The attorney client privilege provides a special protection for attorneys and clients. Essentially, an attorney can refuse to testify in court against his or her own client without the clients consent. Working with an attorney for a taxpayer under the protection of a Kovel letter agreement is the only way to protect the accountant from having to testify.

Accountants, tax agents, and other tax practitioners should consider working with an attorney versed in the intricacies of international tax law to reduce their and their clients exposure. Doing so will serve both the taxpayer and the accountant saving them from needless liability.

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