A Kovel agreement (often memorialized with a Kovel letter) is a formal arrangement between a lawyer and a non-lawyer expert (often an accountant)that extends the attorney-client privilege to communications between the lawyer and the non-lawyer expert. In a tax matter, these agreements exist to help attorneys in cases that involve complex tax and/or accounting issues.
Whether you’re an accountant with clients who have legal questions relating to tax law or you’re a taxpayer who needs legal advice on a complicated tax question, continue reading to understand how Kovel agreements work. If you still have questions, contact Wiggam Law and learn how our tax resolution legal services can help.
Key Takeaways
- Kovel agreement – This is an arrangement between a lawyer and a non-lawyer expert that extends the attorney-client privilege to communications between the lawyer and the expert.
- Necessary to provide legal advice – This extension of the attorney-client privilege exists when the expert’s services are essential to the attorney for providing legal advice to their client.
- Not just criminal cases – A Kovel agreement is helpful for any complex tax case involving sensitive information where the highest level of confidentiality is ideal.
- Creating a Kovel agreement – The most important requirements are that the attorney hire the expert, that the expert bills the attorney, and that a Kovel letter outlines the arrangement.
- Talk to a tax lawyer first – In cases where a Kovel agreement may become necessary with an accountant, it’s best to talk to a tax attorney before talking to a CPA to maximize the scope of protection offered by a Kovel agreement and confirm its necessity.
Why Do Kovel Agreements Exist?
In tax matters, Kovel agreements exist to extend the attorney-client privilege to non-lawyers with tax expertise who guide clients through tax-related legal cases, but because their professional credentials don’t confer client privilege, they need a special arrangement to provide clients with some of the privacy and security that an attorney can offer. These arrangements stem from the federal court case: United States v. Kovel.
But before getting too deep into Kovel agreements, it’s best to first understand the attorney-client privilege and why it exists.
The Attorney-Client Privilege
The attorney-client privilege is a legal rule that protects the privacy of conversations between a lawyer and their client when that client is seeking legal advice. The privilege is strong because of the belief that without it, clients would refuse to disclose important information to their attorney for fear that the information could be used against them.
United States v. Kovel
This is a 1961 federal court case that involved a tax law firm hiring an accountant named Louis Kovel to use his tax expertise to assist lawyers handling legal cases.
A government investigation into possible federal tax crimes by the law firm’s client sought the testimony of Kovel. He refused to fully cooperate, citing attorney-client privilege. The government believed that the privilege didn’t apply because Kovel was an accountant.
The court sided with Kovel and reasoned that Kovel’s skills and experience were necessary to help the attorney understand the client’s financial situation. The court compared Kovel’s situation to that of an attorney who speaks a different language from the client and hires an interpreter to facilitate communication between the attorney and the client.
The Accountant-Client Privilege
But why have Kovel agreements if the communications between an accountant and their client are protected by the accountant-client privilege? It’s because this privilege, as outlined by Section 7525 of the Internal Revenue Code (IRC), has more limitations. Specifically, the accountant-client privilege doesn’t apply to:
- Criminal matters
- Non-IRS investigations
- Private civil actions
The bottom line is that it’s much easier for the government to get an accountant to testify about things that were said during the scope of tax representation than it is to get a lawyer to testify about things that were said during legal representation.
The Purpose of Kovel Agreements
A Kovel agreement allows the attorney to consult with these subject-matter experts without fear that the discussions could be revealed. It protects communications between attorneys and the accountants they hire when those communications relate to the interpretation and understanding of financial information.
These agreements exist to help a lawyer provide the best legal advice possible, not to provide additional confidentiality protections to individuals seeking the advice of a CPA. Therefore, Kovel agreements are often used in civil tax matters just as often (if not more often) than in criminal tax cases.
When To Consider a Kovel Agreement
Kovel agreements are useful in any scenario where confidentiality is a concern, not just when there’s a fear of criminal prosecution. Common scenarios where a Kovel letter might come in handy include:
- Complicated IRS tax audits and examinations spanning multiple years.
- Catching up with unfiled tax returns or unreported cryptocurrency gains.
- FBAR/foreign reporting compliance and other international tax matters.
- Substantial changes to prior filed returns that require amended tax returns, potentially including situations where a ghost preparer did your return.
- Cases involving allegations of fraud or tax evasion.
- Financial concerns that require detailed financial investigations, such as forensic accounting.
- Financial or business planning that relates to (or could lead to) civil lawsuits, including business litigation.
- A tax preparer facing allegations that they lied on a tax return.
- Tax matters that could lead to large civil penalties and/or criminal prosecution.
- Any case involving complex financial issues that requires the expertise of an accounting specialist.
How a Kovel Arrangement Works
Kovel arrangements typically arise in the following sequence of events:
- The client hires a tax lawyer.
- The tax lawyer analyzes the client’s case and realizes they need the help of an accountant to fully understand the scope of the client’s tax situation.
- The tax lawyer creates a formal arrangement with the accountant using a Kovel letter.
What’s a Kovel Letter?
This is a document that officially establishes a Kovel agreement. Most Kovel letters with accountants will include the following language:
- The accountant is being hired to enable the attorney to provide legal advice to their client.
- The communications between the attorney and accountant shall remain confidential and are intended to be protected by the attorney-client privilege.
- The scope of work the accountant will do for the attorney.
- The accountant is to work at the direction of the attorney for the sole purpose of helping that attorney provide legal advice.
- The accountant’s work belongs to the attorney and/or the attorney’s firm.
Another important requirement for creating a Kovel arrangement is for the attorney to hire the accountant. If the accountant hires the attorney or the client hires the accountant, then it’s far more difficult to establish a Kovel arrangement.
Remember, a Kovel arrangement is essentially extending attorney-client privilege to a third party. If the accountant works for the client or the attorney works for the accountant, it’s difficult to argue that the accountant is serving as an indispensable consultant for the attorney so that the attorney may provide legal advice to the client.
In addition to the above, other “Kovel best practices” include:
- Segregating the accountant’s files relating to privileged work and non-privileged work.
- Marking documents as “privileged” or “confidential” when applicable.
- Ensuring any communications from the accountant are directed to the attorney. If the accountant must contact the client directly, the accountant should send a copy of the communication to the lawyer.
- The accountant should bill the attorney (and not the client) for the accountant’s services and any related expenses.
Why Have a Kovel Agreement Instead of Just Hiring a CPA?
A Kovel agreement is often a better option than simply hiring an accountant directly for the following reasons:
- Many tax issues require the services of both a legal and tax/financial professional.
- A key component of a Kovel agreement is for the attorney to hire the accountant, not the other way around.
- The extension of the attorney-client privilege only kicks in after the creation of the Kovel agreement. Any information the accountant has before the Kovel letter is unlikely to be protected by this privilege.
- The accountant-client privilege has fewer protections than the attorney-client privilege.
Common Misconceptions About Kovel Agreements
As helpful as they are, Kovel agreements aren’t perfect and are sometimes misunderstood. Below are the more common mistakes people sometimes make with Kovel agreements:
- Assume they’re only necessary for criminal tax cases.
- Aren’t necessary for “routine” tax matters.
- Believe they offer absolute protection for anything said or done with the attorney or accountant.
- Forget that the protections provided by a Kovel agreement have the same limitations that apply to the attorney-client privilege, such as the crime-fraud exception.
- Kovel protections can apply retroactively to an accountant’s work or communications that existed before the Kovel agreement.
Why It’s Important to Talk to a Tax Lawyer First
Because of the requirements for establishing a Kovel arrangement, it usually makes sense to talk to a tax lawyer before talking to a CPA or other tax professional. Tax attorneys are also well-positioned to determine whether consulting with an accountant is needed and, if so, whether a Kovel letter is necessary.
How Wiggam Law Approaches Tax Kovel Agreements
Not all tax challenges require an attorney, and of the ones that do, not all of them require the help of a CPA or other accounting professional. That said, there are still many cases that could benefit from the coordinated efforts of a lawyer, CPA, and/or other financial professional.
At Wiggam Law, our tax attorneys know when the services of an accountant are required. And if they are, we know how to properly establish a Kovel agreement in a way that provides you with maximum protection. For many, this often comes up in sensitive civil matters with little possibility of criminal charges. If you have a complex tax issue that could benefit from the help of an attorney and accountant, contact us to set up a consultation. You can reach us online or by calling (404) 609-1300.
Kovel Agreement FAQs
What is a Kovel agreement in simple terms?
It’s an arrangement between a lawyer and an expert that extends the attorney-client privilege to communications between the lawyer and the expert.
What is a Kovel letter vs a Kovel agreement?
These terms are interchangeable. They’re both an agreement or “letter” between the lawyer and expert that outlines the scope of their relationship. It also lists any requirements and conditions they must both abide by to ensure the attorney-client privilege applies to their communications.
Do Kovel agreements only apply to criminal cases?
No, Kovel agreements can be used in civil tax matters, especially if there’s a fear that things could escalate and result in litigation.
When should accountants use Kovel agreements?
Consider these arrangements when you’ve been approached by a client whose concern could benefit from the additional protections of attorney-client privilege. Rather than engaging the client, contact a tax attorney who handles Kovel agreements at their firm. The Journal of Accountancy offers more guidance.
When might a lawyer suggest a Kovel agreement?
If a lawyer believes they need an expert’s advice to provide legal advice to their client, the lawyer may suggest a Kovel agreement.
Is the accountant-client privilege protected from the IRS?
Yes, as long as it’s a noncriminal tax matter. Also, it’s important to understand that even if the IRS is barred from knowing what was said or done, a lawyer or judge in a non-IRS, civil, or criminal matter might be able to get through the accountant-client privilege.
Does the Kovel doctrine apply the same way in all cases?
No, some states and federal courts from various circuits interpret and apply the Kovel doctrine differently.
