Courts Limit the Kovel Rule

The Kovel Rule represents the principle that lawyer-client privilege extends to conversations with accounts and other experts. Louis Kovel was a former IRS agent who worked for a tax law firm. In 1961, a grand jury subpoenaed Kovel in a tax case involving a client of the firm. Kovel refused to answer questions concerning conversations he had with the client and was sentenced to a year in prison for contempt of court. The decision was later overturned by an appeals court. Recent cases, however, have started to limit Kovel’s reach, and courts have started to find that Kovel does not necessarily cover communications with accountants.

In U.S. v. Hatfield, a 2010 case from New York’s Eastern District, the court held that the Kovel Rule did not protect lawyer-accountant communications. In a 2011 tax case involving a charitable deduction, a Ninth Circuit appeals court held that the Kovel Rule did not extend to a man who provided an appraisal.

As a result of these recent cases, one attorney now ensures that his communications with his accountant stay protected by first clarifying the accountant’s role and then separating any related documents. Another attorney states that “there is a false perception of what Kovel really is, so that some practitioners have gotten careless. The government’s position is that very little [communication] is protected.”

Though Section 7525 of the tax code protects CPA-client communications, the rule is very limited. Additionally, though certain states have heightened CPA-client privilege, these rules do not apply in federal cases. Taxpayers do not typically need to worry about the Kovel Rule or its reach, but it is important for attorneys, accountants, and other experts to ensure that their communications are protected and stay confidential in light of these recent rulings.

Arden Dale, Why Your CPA Might Blab, The Wall Street Journal, Jun. 18, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.