Protecting Attorney-Client Privilege in IRS Streamlined Filing Compliance Submissions: The Role of Kovel Agreements
The IRS Streamlined Filing Compliance Procedures—which include 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. It does not protect underlying facts, however, and it generally does not extend to routine tax compliance work—such as return preparation—even when performed by an attorney.
This distinction matters in tax matters because communications involving accountants are not automatically privileged. Such a communication may still be protected, but only if the accountant’s involvement is necessary—or at least highly useful—to enable the lawyer to render legal advice, and the communication is made in confidence for that purpose.
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, when the non-lawyer functions as a “translator” or interpreter of accounting information that the lawyer needs in order to provide legal advice. In Kovel, the Second Circuit rejected both extremes—it did not hold that accountants can never be covered by privilege, nor did it hold that all communications with an accountant employed by a law firm are automatically privileged.
What matters is the purpose of the communication. For Kovel protection to apply:
1. The communication must be made confidentially and for the purpose of obtaining legal advice from the lawyer—not accounting advice from the accountant.
2. The accountant’s role must be to assist the attorney in providing legal advice, not to provide standalone accounting services. If the advice sought is the accountant’s rather than the lawyer’s, no Kovel protection applies.
3. Counsel’s retention and supervision of the accountant is the cleaner structure. While privilege may also extend where an accountant’s presence is necessary or highly useful to facilitate legal advice even if retained by the client—provided confidentiality is maintained—having counsel directly retain and direct the accountant generally strengthens the privilege position and reduces waiver risk.
4. A formal agreement should be in place—often called a Kovel letter—outlining the scope of the engagement and confirming that communications flow through legal counsel.
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.
Note also that there is a separate, narrower statutory protection under the tax code for confidential communications between a taxpayer and a federally authorized tax practitioner. That statutory rule applies only in noncriminal tax matters before the IRS and in noncriminal tax proceedings in federal court, and it does not apply to communications connected with promotion of a tax shelter. For streamlined submissions where criminal exposure may be a concern, that statutory protection is materially less protective than attorney-client privilege under Kovel and should not be treated as a substitute.
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 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 protected—provided they are confidential and made for the purpose of enabling counsel to render legal advice, rather than for accounting services or return preparation. The attorney oversees the legal analysis, and the accountant supports that legal work with technical calculations and data reconstruction.
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 the purpose of facilitating legal advice.
• Document the relationship clearly. A Kovel letter should define scope and confirm that communications flow through legal counsel.
• Segregate privileged and non-privileged functions. Tax return preparation is not privileged—even if done by an accountant under a Kovel arrangement. Legal analysis about whether, when, and how to correct prior filings may be privileged; but communications and documents used to prepare returns or other materials intended to be filed or disclosed are generally not.
• Avoid mixed communications. Emails and documents covering both privileged and non-privileged subjects can undermine the privilege claim across the entire communication.
• Maintain confidentiality. Privilege can be waived by disclosure to third parties. Courts often require document-by-document support for privilege claims rather than accepting broad categorical assertions.
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.
The crime-fraud exception is not a remote concern in the streamlined context. A taxpayer who provides false information to an attorney, or who misuses the legal process to submit a certification of non-willfulness that is not genuine, risks losing privilege protection over those communications. In the context of the Streamlined Procedures, where the signed certification of non-willfulness is central, the stakes are particularly high.
Privilege is not absolute. Structuring the representation properly—and ensuring that the facts presented to counsel are accurate—is essential to preserving it.
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 the IRS’s general statutory authority to assess and administer the tax code. There is no safe harbor or codified right to participate in the streamlined program. It is not codified in federal regulations, nor has it been published as a formal Revenue Procedure or Revenue Ruling. Instead, its terms are laid out in IRS FAQs, website pages, internal memoranda, and taxpayer forms—including 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 properly structured Kovel agreement, can provide essential protection—especially when the narrative surrounding intent is at the heart of the submission.
The key is getting the structure right from the outset: engage counsel first, retain the accountant through counsel, segregate privileged legal analysis from return-preparation work, and maintain strict confidentiality throughout.
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