One of many sensitive issues that a criminal tax attorney must address is whether the attorney-client privilege extends to those involved in a case, and in particular, whether such privilege applies to accountants and CPAs who work on the case. In United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961), the Second Circuit Court of Appeals extended the attorney-client privilege to accountants assisting attorneys in criminal tax claims. This has become known as "Koveling" and has allowed accountants--known as Kovel accountants--to assist practicing tax attorneys giving legal services to clients. However, this privilege does have some caveats that, if not known, could cause ordinarily privileged information to be released to the IRS if one is not careful.
Under I.R.C. § 7525, privileged communications between a taxpayer and an accountant are only available in non-criminal tax matters. Koveling allows this privilege to extend to criminal tax cases when accountants assist attorneys render legal services. This privilege is similar to the work product privilege, which allows any information that was given while anticipating litigation to be protected from opposing counsel.
If a taxpayer is facing criminal tax charges, it is unwise to have the taxpayer's regular accountant be the Kovel accountant in the criminal tax claim. While the regular accountant may already know the ins and outs of the taxpayer's current situation, this will only hurt the taxpayer. While Koveling protects information gathered by an accountant assisting an attorney anticipating litigation, any information gathered outside of that scope is fair game for the IRS. A regular accountant may know the taxpayer's situation from the outset, but that opens the risk that the accountant may already know information that would be damaging to the taxpayer before litigation was anticipated. The accountant then would have to release that information to the IRS if they requested it. A new accountant, on the other hand, could successfully gather privileged information since everything they gather is "Kovelized."
Another important fact is that Koveling only applies to providing legal services. As an example, an accountant would not be a Kovel accountant for merely filing tax returns. But, if tax returns are prepared along with some legal service, then Koveling may apply. A taxpayer's safest course of conduct would be to have a Kovel accountant work with attorneys in developing information, and then have another accountant actually prepare the tax returns if a client wanted both services performed. While this option is more costly since it would require hiring two different accountants, this course of action provides the greatest protection to a client/taxpayer.
Ultimately, while Koveling can be very beneficial in helping tax attorneys assist clients facing criminal tax charges, this privilege is not absolute. If a Kovel accountant provides any services other than legal services for an attorney's client, or is a client's regular accountant before the client is charged with a tax crime, the Government could bypass the Kovel privilege--thereby allowing a client's potentially damaging information to be released to the IRS or Department of Justice.