Deja Vu All Over Again (1/24/13)

The U.K. Supreme Court held that "Advice by accountants cannot be kept secret in the same way that legal counsel is confidential."  See Estelle Shirbon, Tax advice not secret like legal counsel, UK court rules (Reuters 11/23/13), here.

I use the famous Yogi Berra quote (Wikipedia entry here) as the title of this article, but the U.S. has been through this fight before and reached the same result.

I offer the following on the U.S. rule from the most recent draft of my Federal Tax Procedure book (footnotes omitted):

The Courts have resisted expanding the common-law privileges that are available even when strong policy arguments are made that privileges should be available.  Courts thus routinely reject the existence of an accountant/client privilege even though one may exist under state law.  Couch v. United States, 409 U.S. 322 (1973).  In United States v. Arthur Young & Co., 465 U.S. 805 (1984), the IRS issued a summons to the taxpayer's independent certified public accountants to obtain the information and documents behind the tax reserve reported on the taxpayer's certified financial statements.

At this point, I should explain generally the jargon that helps explain the law and IRS policy and practice in this area.  Publicly held companies prepare and file public financial statements that report the financial results of their operations for a period.  The financial statements include a profit and loss statement for a period (a year period for the major filings), as well as an ending balance sheet, and extensive notes to assist in making the statements comprehensible.  In reporting a result for the period, a company must accrue liabilities that arose during the period and, on the ending balance sheet, must show any accrued but unpaid liabilities.  Under financial accounting standards, reserves for federal income tax liabilities must be accrued and reserved in certain cases.  Specifically, with respect to tax planning that might otherwise be reflected as a benefit on the financial statements, reserves must be accrued to reflect the probability that the benefits may not be ultimately sustained.  In making a decision whether and how much to reserve for such unpaid potential liabilities, a company internally will prepare workpapers that back up its decisions.  Similarly, when the independent auditor then attests the financial statements, the auditor prepares audit workpapers that back up the attestation.  The company’s and the auditor’s workpapers underlying that type of liability or reserve are called “tax accrual workpapers” or some variation of that term.  The tax accrual workpapers should be distinguished from the “tax reconciliation workpapers” which reconcile the financial reporting to the tax return.  The tax reconciliation workpapers are not audit workpapers, because they are not prepared by the company in making the financial statements or by the independent accountants in attesting them.