Understanding the Statutory Tax Practitioner Privilege: What Is Tax Shelter “Promotion”?

The Internal Revenue Service (IRS) is given the broad authority to conduct investigations, file suit, and request documents from taxpayers when necessary to enforce the provisions of the Internal Revenue Code. The IRS can seek to acquire written communications between a taxpayer and his tax adviser. Such documents may include tax opinions and tax planning memoranda. Taxpayers represented by lawyers are able to protect some of these communications through the common law attorney–client privilege. Certain nonlawyers are also authorized to represent taxpayers before the IRS and to give tax planning advice, but their communications fall outside the scope of the attorney–client privilege. This group includes accountants, enrolled agents, and enrolled actuaries. In 1998, Congress created the tax practitioner–client privilege, which extended the protections of the attorney–client privilege to certain communications between nonlawyer tax practitioners and their clients. This statutory privilege, however, carves out an exception—it does not apply to written communications related to the “promotion” of a client’s participation in a tax shelter. Recently, a disagreement has arisen regarding the scope of this exception and the meaning of the word “promotion.”