Videos claiming they have “Secrets Your Accountant Will Not Tell You” have become a cottage industry. Under the surface these videos claim that tax professionals (CPAs, enrolled agents, and attorneys) intentionally withhold tax strategies that will save their clients money by lowering their taxes.
Tax professionals, your accountant, has no incentive to withhold legal tax reducing strategies from you. Providing more services that put money in your pocket is how accountants earn their fee. Yet, there are some secrets your accountant can’t legally tell you and you want it that way. Enter the Kovel Agreement, sometimes called a Kovel Letter, where you can increase the secrets your accountant keeps.
Dangers From Accountants That Talk Too Much
TikTok videos claiming they discovered a tax strategy “your accountant doesn’t know” don’t actually provide tax strategies your accountant does not know. Seasoned tax professionals are well aware of tax strategies, including the ones on hyped up videos.
The problem with the videos is that “your” accountant knows all about that strategy and it is not a valid strategy. If you get caught, serious penalties will be involved and any money “you saved” will be paid the the IRS, plus interest and penalties. Sorry. Tax scams and fraudulent tax strategies are all too common and your accountant has heard them all too often.
For the record, “your accountant” wants to provide you with high quality service. They do not withhold strategies that reduce your taxes! Using additional tax strategies is a perfect way for the accountant to enjoy a higher fee. The incentive is to tell you the secret, not keep it a secret.
Now to an issue most non-tax professionals don’t know about. There are times “your accountant” does have secrets she can’t, and shouldn’t, tell you.
Accountants hear more than most other professionals. People tell their doctor about an embarrassing rash, they tell their attorney about certain unacceptable behaviors, but they tell their accountant all this and more because it just might be tax deductible.
Over my career I have heard plenty of stories. I was aware of many divorces before the other party knew. (They want to know what the financial and tax consequences are before taking that step.) Every client that gets a DUI asks if they can deduct the heavy costs for their behavior. (The answer is NO! Then I give them some non-tax advice. Stop drinking and driving! Get help if necessary.) And on it goes.
The secret your accountant will not tell you is personal and private information about other clients. That also means that your information is kept confidential.
And this is where it gets messy. There is “confidential” information and there is “privileged” information. There is a massive difference between these two words and mixing them up can destroy your life.
Confidential vs Privileged
Personal information you communicate to your accountant, including tax documents and business or personal financial documents, are confidential. (IRC §7216) Your accountant cannot share this information with anyone other than you and as prescribed by law. Your accountant will use this information in preparing and filing a tax return and in consulting with you on tax and other financial matters. It should be noted that confidentiality extends to non-governmental entities only. Courts routinely subpoena your accountant for working papers to use in a criminal cases. And the IRS receives your tax return from the accountant and will request additional documents in the event of an audit.
Privileged information is information your accountant has in certain tax and financial matters that courts and the IRS are not allowed to demand for use against you. This next part is very important! While all communications with your accountant are confidential, virtually none of these communications are privileged. (§7525) Under most circumstances you have very limited privilege with your accountant and it only applies in civil matters. If it is a criminal matter none of your communications with your accountant, in any form, is privileged unless a properly executed Kovel Agreement exists.
An example from my office from about a decade ago illustrates the difference between confidentiality and privilege.
A non-client came to my office looking to engage my services. He was a small business owner with a thick stack of IRS letters and unpaid payroll taxes.
A CPA in my office looked at the stack of IRS letters and asked for my help. A brief review of the IRS letters showed the situation had risen to a criminal investigation. I informed the individual to say absolutely nothing and to listen closely. “Take your paperwork, all of it, and leave my office. Get an attorney. Anything you say, any notes I take, any paperwork you leave will be subpoenaed by the prosecutor. If you want my help, have your attorney send me a Kovel letter. That way attorney-client privilege extends to my work.”
Before we turn to discussing the Kovel Agreement, know that 20 minutes after above-mentioned potential client left my office two IRS Criminal Investigations officers entered my office with a search warrant. Yes, it can be that serious. I later heard the individual was convicted of tax crimes and sentenced to four years in prison. I am glad I was never involved. If you are an accountant, know when to take a pass. And then pass quickly! For everyone else in the room, accountants are wonderful professionals, but they are not licensed to protect you in criminal and other serious matters. Know when you need an attorney first.
Kovel Agreements
Attorneys are legal professionals that often do not understand complex tax issues. Attorneys that handle criminal cases involving taxes generally handle research internally. However, it is possible for attorney-client privilege to extend to an outside accountant’s work if proper steps are taken.
A Kovel Agreement is where an attorney engages an accountant for research and consulting in preparation for a legal matter. A Kovel Agreement doesn’t require a letter, but a letter stating the engagement/agreement are preferable.
Once a Kovel Agreement is in place attorney-client privilege extends to the accountant’s work… sometimes. Yes, there are some issues never covered by attorney-client privilege, even when handled in-house at the attorney’s office. A perfect example is the preparation of a tax return. Your tax information, including working papers to prepare your tax return and the return itself, are not covered by attorney-client privilege. For this reason alone it is never a good idea to use your current tax professional in a Kovel situation as the information in preparing the tax return pollutes most privileged information, even when a Kovel Agreement is in place.
Anyone who has previously prepared your tax return should never be used by the attorney in a criminal case. Kovel does NOT provide privilege from information and data collected in the process of preparing your tax return. If this were a TikTok video we would say your accountant knows too much. And its true.
Your attorney can engage an accountant in preparing for a legal case. You communicate with your attorney, your attorney communicates with the accountant. The accountant can usually sit in on a conversation with you and your attorney if it is part of the accountant’s research in preparation for litigation for the attorney.
In the four plus decades I have been in practice I have been contacted a small number of times for help in criminal and civil cases. Often the situation involves unfiled tax returns. Recently an attorney asked me to prepare multiple unfiled tax returns for a client that was facing federal gun charges. The attorney was unfamiliar with Kovel and so I explained the process to her. She did her own research as well. Since I would never be part of the criminal case I was hired to handle the unfiled tax returns in the hopes of preventing tax charges being added to the gun charges. There was nothing prosecutors could use me for against the attorney’s client.
However, there have been a few fraud cases where I handled research in the criminal matter. Once the attorney and I had a Kovel Agreement in place I went to work. I never took the stand unless the defense attorney requested it. (They didn’t.) Before I accepted the engagement I checked my database to assure the person involved was never a tax client.
This conversation is not meant to scare anyone. In most instances your accountant can handle tax and other financial matters for you without issue. But when it rises to a legal issues, civil or criminal, you need an attorney. If an accountant is needed the attorney needs to engage the accountant, not you. And it can’t be a friend or accountant you previously worked with because it could pierce the attorney-client privilege you want in place.
Secrets Your Accountant Never Tells You
The TikTok videos proclaim with great excitement that they have a secret either your accountant doesn’t know or will not tell you. The truth is the TikTok video is either a scam or ignorant advice (100% wrong).
Often times these videos come from people that read some tax code and think they made a discovery. Of course, regulations interpret The Code and it might not mean what you think it means. The Tax Court can further define what a section of tax code really means.
Your accountant is not keeping any tax strategy secrets from you. Professional ethics require confidentiality. There is even a very limited amount of privilege in certain cases.
The secrets your accountant keeps are those of his client’s. And you want it that way! Your accountant will be happy to discuss tax strategies with you. Wonderful information will be shared unless it involves breaking confidentiality.
And that is why there are Secrets Accountants Can’t Tell You.
