Protecting Attorney-Client Privilege in IRS Streamlined Filing Compliance Submissions: The Role of Kovel Agreements
The IRS Streamlined Filing Compliance Procedures (which includes the Streamlined Domestic Offshore Procedures and the Streamlined Foreign Offshore Procedures) offer a critical path to compliance for taxpayers who failed to report foreign financial assets but whose conduct was non-willful. While these procedures provide relief from certain penalties, the decision to come forward is often accompanied by sensitive discussions about intent, omissions, and timing—issues that could be pivotal if the IRS challenges the non-willfulness assertion. This raises an essential question: how do we protect those communications during the disclosure process?
I. Privilege Concerns in Tax Compliance
Attorney-client privilege exists to protect confidential communications between a client and their attorney when made for the purpose of obtaining legal advice. However, this privilege does not extend to accountants—even when they are providing advice on complex tax matters—unless specific structures are put in place.
This distinction was made clear in United States v. Arthur Young & Co., 465 U.S. 805 (1984), where the Supreme Court held that there is no accountant-client privilege under federal law in criminal or civil tax proceedings. The Court emphasized that the public has a right to “every man’s evidence,” and that accountants serve as “public watchdogs,” not confidential advisors.
In Florida, attorney-client privilege is codified in § 90.502, Florida Statutes, which protects communications made for the purpose of securing legal services. Importantly, this privilege may extend to third parties—such as accountants—when their involvement is necessary to facilitate legal advice. This is where the doctrine established in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), becomes crucial.
II. The Kovel Agreement: Bridging Legal and Accounting Expertise
The Kovel doctrine allows attorneys to extend privilege to non-lawyers, such as accountants, if the non-lawyer is acting as a “translator” or facilitator of legal advice. In Kovel, the Second Circuit held that communications with an accountant working under the direction of an attorney could be protected as part of the attorney-client relationship.
For this protection to apply:
The accountant must be engaged by the attorney, not the client directly.
The accountant’s role must be to assist the attorney in providing legal advice, not to provide standalone accounting services.
A formal agreement should be in place—often called a Kovel letter—outlining the scope of engagement.
IRS Chief Counsel has acknowledged the application of privilege in these settings in internal memoranda, but also cautions that the privilege is narrowly construed and does not apply to the preparation of tax returns or communications intended for eventual disclosure.
III. Streamlined Procedures and the Risk of Disclosure
The Streamlined Filing Compliance Procedures require the taxpayer to submit amended or delinquent tax returns, FBARs, and a signed Certification of Non-Willfulness—a narrative explanation of their conduct. This certification becomes a key document if the IRS later audits the submission or disputes the taxpayer’s good-faith intent.
Discussions surrounding how to frame the facts, what to include or omit, and whether the taxpayer qualifies for the streamlined program are all potentially sensitive. If these discussions occur outside of the protection of attorney-client privilege—such as directly with an accountant—they may be discoverable.
In contrast, if a taxpayer first retains an attorney, and the attorney then brings in an accountant via a Kovel agreement, these same communications may be shielded. The attorney oversees the legal analysis, and the accountant supports the legal work with technical calculations, data reconstruction, or return preparation.
IV. Best Practices for Maintaining Privilege
To ensure the protection of privilege in Streamlined or other voluntary disclosures:
Engage legal counsel early. Privilege applies from the first confidential consultation, so the initial point of contact matters.
Use a Kovel agreement to structure the engagement of accountants. Ensure the accountant is working at the direction of the attorney and only for purposes of facilitating legal advice.
Document the relationship clearly. A Kovel letter should define scope and confirm that communications flow through legal counsel.
Avoid mixing privileged and non-privileged functions. Tax return preparation is not privileged—even if done by an accountant under Kovel.
V. Limits of Privilege: The Crime-Fraud Exception
Even when attorney-client privilege exists, courts can pierce that protection under the crime-fraud exception. This exception applies when a client uses legal advice or attorney communications to further a crime or fraud—even unknowingly.
In United States v. Lax, No. 1:18-cv-04061 (E.D.N.Y. 2022), the court addressed whether privilege protected communications in a civil tax enforcement action. The IRS alleged that the taxpayer, Lax, had engaged in fraudulent behavior with the assistance of counsel. The court permitted the government to access attorney communications under the crime-fraud exception, finding sufficient evidence that the legal advice may have furthered a scheme to mislead the IRS.
This case serves as a warning: privilege is not absolute. If a taxpayer provides false information to an attorney or misuses the legal process, those communications may lose protection. In the context of the Streamlined Procedures, where a signed certification of non-willfulness is central, the stakes are particularly high.
VI. Legal Authority for the Streamlined Filing Compliance Procedures
It is important to understand that the Streamlined Filing Compliance Procedures (SFCP) are not grounded in statute. Instead, they were developed and announced administratively by the IRS, originally in 2012 and substantially revised in June 2014, in response to increasing offshore noncompliance among U.S. taxpayers.
The SFCP exists as an exercise of IRS enforcement discretion, grounded in general statutory authority, including:
IRC § 6201 – authority to assess tax,
IRC § 7801 and § 7803 – authority of the Secretary of the Treasury and the IRS Commissioner to administer the Internal Revenue Code, and
Treasury regulations granting discretion in enforcement and penalty administration.
There is no safe harbor or codified right to participate in the streamlined program. It is not found in the Internal Revenue Code or the Code of Federal Regulations, nor has it been published as formal guidance in the Internal Revenue Bulletin. Instead, its terms are laid out in IRS FAQs, website pages, internal memoranda, and taxpayer forms such as Form 14654 (U.S. residents) and Form 14653 (non-residents).
Because of its administrative nature, the IRS may modify or terminate the program at any time. Likewise, a taxpayer who submits under SFCP has no formal appeal rights if the IRS later determines that the submission was invalid due to willfulness or other deficiencies.
VII. Conclusion
Taxpayers seeking relief under the Streamlined Filing Compliance Procedures may be exposing themselves to legal risk if they do not structure their representation properly. Attorney-client privilege, when preserved through a Kovel agreement, can provide essential protection—especially when the narrative surrounding intent is at the heart of the submission.
As the IRS continues to scrutinize offshore compliance, maintaining privilege isn’t just good practice—it’s a critical safeguard.
For customized tax advice, contact Christine Alexis Concepción at caconcepcion@concepcionlaw.com