The Kovel Rule and Lawyer-Client Confidentiality
Does it apply to tax advice?
Attorney-client privilege, also sometimes called lawyer-client privilege, is the provision in the law that says that what you tell your lawyer stays between you and your lawyer. Your attorney can't be forced to testify as to what you said. They don't have to provide their notes of the conversation in the discovery process—the part of a lawsuit that involves both sides having a legal obligation to share all information that's pertinent to the case. Lawyer-client confidentiality is an offshoot of this provision.
Lawyer-Client Privilege vs. Confidentiality
Lawyer-client confidentiality isn't quite the same as a lawyer-client privilege, although it's based on the same premise. Confidentiality refers to an attorney's legal obligation not to divulge what his client tells him. Doing so is an ethics violation and could lead to disciplinary sanctions unless the client gives his lawyer his informed consent to go ahead and speak.
The client can waive his right to lawyer-client privilege as well.
The Kovel Rule
The Kovel Rule is an extension of the legal principles of lawyer-client privilege and confidentiality. In addition to lawyers, it also extends to other professional experts who might be involved in a case. Such professionals can include the accountant who is consulted by the client or indirectly through the client's attorney. These experts might include financial advisors or financial planners.
The rule takes its name from Louis Kovel, an IRS agent who later joined a law firm that specialized in tax cases. He lent his expertise in tax accounting to case preparation and client representation. In 1961, Kovel was sentenced to prison for refusing to answer questions in court about discussions he had with a client. He believed that those conversations were protected by the principle of lawyer-client privilege, and an appeals court agreed with him. His conviction was overturned.
Challenges to the Rule
All the same, the IRS has won several key decisions in the federal courts, limiting the extent of the protections afforded to clients under the Kovel Rule. The upshot is that clients are becoming less frank in their discussions with tax counsel, which, in turn, makes it more difficult for these attorneys, accountants, and other professionals to give them sound and accurate advice. A 2010 case established the precedent that the Kovel Rule does not apply to charges involving criminal activities such as fraud and tax evasion.
The bottom line is that an accountant's advice in a tax case is not automatically protected by the principles of confidentiality and privilege, regardless of the intent of the Kovel Rule. The rule might afford some slight protection or at least a blurring of the line if the accountant has been formally engaged in writing by the attorney. But ensuring that the Kovel Rule is upheld typically requires much more detailed legal maneuvering.
Some states are more protective of accountant-client discussions than the federal government, but keep in mind that the IRS has historically taken a hard and firm stand against this rule and can probably be counted on to challenge it, particularly when serious charges are involved.