Accountants have privilege envy. For decades they have unsuccessfully attempted to get courts to recognize an accountant-client privilege-a privilege analogous to the attorney-client privilege-that protects communications between them and their clients. They have now shifted their efforts to Congress, where they are lobbying heavily to have a privilege included in the bills to restructure the Internal Revenue Service. Lawyers, of course, have raised objections. But to the extent that accountants are granted a limited license to practice tax law, their work should be assisted with the privilege that facilitates the same representation by lawyers.

An accountant's communications with a client now receive a privilege protection only if the accountant is working as an agent of the client's attorney. The attorney-client privilege extends to individuals (law clerks, paralegals, secretaries, expert witnesses, and accountants) who assist the attorney in rendering legal assistance to the client. Therefore, when a corporation conducts a confidential internal investigation that involves the need for accountants to audit records, it can ensure the confidentiality of the investigation only by first retaining a lawyer, who, in turn, retains accountants to work as her "assistants." If the corporation retained the accountants directly to perform the same services, thereby eliminating the fees of the attorney, communications with the accountants and their report would not be confidential.

Not surprisingly, lawyers oppose extending the privilege to the work of accountants (independent of working with lawyers) because it will eliminate the need for clients to route accounting type work through attorneys as "legal assistance." Even if the application of an accountant-client privilege were limited to tax practice before the IRS, and perhaps the Tax Court, this could represent a major loss of revenue for tax lawyers. The proposals pending in Congress, however, have a potentially greater effect.

The bill that passed the House late last year (H.R. 2676) would allow a taxpayer to assert a privilege for "tax advice" that was furnished by a person authorized to practice before the IRS (including many accountants). The privilege could be asserted in any noncriminal proceeding before the IRS to the same extent as if the tax adviser were a lawyer. The version of the bill reported by the Senate Finance Committee last month would also allow the privilege to be asserted in a noncriminal tax proceeding before any federal court.

Either version of the bill would give accountants essentially the same status that already has been given to patent agents and trademark agents (who also can be nonlawyers) who represent individuals before the U.S. Patent and Trademark Office. Because those agents are licensed to perform limited legal services, they are provided with the same tools of the legal trade as lawyers-namely the attorney-client privilege. And because this license is granted by a federal agency, the authorization pre-empts state laws prohibiting the practice of law without being a member of the bar.

Arguing against the creation of an accountant-client privilege, lawyers claim that accountants are not bound by the lawyers' code of professional conduct and that the nature of accounting work will lead to irreconcilable conflicts of interest. If these arguments are valid, they would justify precluding accountants from representing individuals before any administrative or judicial body. But if accountants are authorized to practice tax law before the IRS or the Tax Court (as patent and trademark agents are before the PTO) there is no justification, other than attorneys' self-interest, for denying them the privilege that lawyers have successfully argued is so fundamental to the services that lawyers themselves provide.

The problem the legal profession is facing here is somewhat akin to the problem it faced with accountants doing tax return preparation. That work could have been defined as "legal assistance thereby precluding accountants from engaging in the service on penalty of unauthorized practice of law. But that would have been impractical because the demand for the service far surpassed the availability of lawyers. Therefore, tax preparation work was not characterized as "legal" work but as "ministerial" or "accounting" work. (Communications related to preparing tax returns are therefore not privileged, regardless of whether they involve accountants or lawyers.)

Representing taxpayers in adversarial proceedings before the IRS cannot escape the "legal assistance" label. But the demand for the service, particularly among lower income taxpayers, far exceeds the supply of available tax lawyers, not to mention the ability of those taxpayers to pay. Consequently, if accountants are precluded from engaging in such "legal" representation, significant societal needs will go unmet.

Of course, lawyers understand that the recognition of even a limited privilege poses a serious economic threat to them. This is because the proposed privilege does not require that the accountant actually represent the taxpayer in the proceeding in which the privilege is asserted (or any other proceeding), only that the accountant be "authorized" to do so. In the Senate bill the protected "tax advice" must be "with respect to a matter which is within the scope of the [accountant's] authority to practice" before the IRS. Once the privilege is recognized, accountants may well provide all types of transactional tax advice and claim that their communications with the taxpayers on all related matters are protected by the privilege.

Because legal "tax advice" is not readily distinguishable from general accounting advice, lawyers who oppose any privilege for accountants have argued that if even a limited tax-advocate privilege is recognized it will be used to shield questionable business transactions. Accountants who are now required to testify about financial aspects of a company--disclosing incriminating details of transactions they have uncovered-would attempt to hide behind the privilege.

This undoubtedly will happen, but lawyers should be the last people making this argument since their own services create the same problem. It is not unusual for lawyers with knowledge of accounting practices to give both tax and accounting advice. Taxpayer communications relating to the tax advice may be protected by the privilege, while the communications relating to the accounting services would not. The same problem arises when a company asks an attorney to conduct an internal investigation of suspected fraud. Both legal and business purposes drive the request for such an investigation. Is the lawyer giving legal advice, which is protected by the privilege, or business advice, which is not?

Each case, of course, must be decided on its unique facts, employing a predominant purpose test and drawing between the various functions that are performed. Not surprisingly, since judges are former practitioners, courts have shown strong bias toward finding that legal purposes predominate. The fact that accountants' work will give rise to the same problems created by lawyers' work is not a justification for denying the privilege protection to that work.

ADVOCATES VS. WATCHDOGS

Another surprising argument that lawyers have made is that are advocates for clients and need confidentiality, while accountants are the "public watchdogs" whose duty is to disclose truth. Even if this distinction were true, how is it justified accountants are given the same advocate role as lawyers in proceedings? Is an accountant's preparation for the representation of taxpayers deserving of, or in need of, any less protection the lawyer's preparation? In the Patent Office, where there is a statutory duty to make complete disclosure of all material facts (not different from the duty of taxpayers to make a full disclosure taxable income to the IRS), patent agents and patent lawyers interact with their clients under the same rule of confidentiality the attorney-client privilege. Why should it be different with accountants before the IRS or a court?

To lobby for a general accountant-client privilege that applies to all accounting services, accountants would need to convince Congress that the absence of a privilege is keeping clients from being candid and open when seeking accounting service. While this claim is widely made by accountants, there is only anecdotal, and not empirical, evidence that it is true. Here Congress appears to be extending a far narrower privilege which protects communications only when the accountant serving in a lawyer's role as a tax adviser and may be asserted only in noncriminal proceedings before the IRS or (under Senate bill) a federal court. It does not shield the client in state courts or before other federal agencies, such as the Security and Exchange Commission.

The proposed privilege appears to adopt the outlines of the attorney-client privilege (since it makes communications with accountant privileged as if they were with an attorney), but it is far more limited than the attorney-client privilege which protects communication between the client and attorney in all proceedings, for all times, unless the protection is waived by the client. Therefore even with this new privilege, clients would still have a compelling reason for consulting an attorney rather than an accountant on tax matters.

AN INTERESTING QUESTION

The "noncriminal Proceedings" limitation on the privilege provision of both the House and Senate bills raises an interesting question: Why should the accountants' privilege be limited while the lawyers' privilege is not? If accountants are doing the work of lawyers, why doesn't the privilege protection need to be same -- total and absolute? If the two privileges are not treated the same the thorny questions of standing, scope, exceptions, and waive questions that have been dealt with under the attorney-client privilege for the past 200 years-will have to be resolved by the courts because they are not addressed in the bills.

Congress should not be creating new professional privileges in this fashion. In Article V of the Federal Rules of Evidence, Congress rejected a series of proposed privilege rules (which included the attorney-client Privilege) and adopted instead a general Provision in Rule 501 that leaves Privileges to the courts. These decisions are to be based on principles of the common law as interpreted in light of reason and experience. Congress should not be drawn into this political debate about specific privileges.

Privilege rules should be enacted only after careful research and skillful drafting that addresses the many problems that courts will have to face in their application. Congress established the process for accomplishing this in the Rules Enabling Act which permits rule changes to be initiated through the Advisory Committee on the Federal Rules of Evidence. This process should first be employed before Congress acts.

More important, if Congress wants to codify privilege rules, it should do so for all privileges. Otherwise it should leave the recognition of specific privileges to judicial decisions under principles of the common law, as it has directed in Rule 501. Ad hoc legislation establishing evidentiary principles for vested interest groups is a disservice not only to the ignored groups who have comparable interests in special Privilege rules, but to the evidence code in general and the process that was so carefully put in place for its maintenance.

If, however, Congress is determined to go forward, lawyers cannot reasonably argue that accountants should be given the authority to practice law without being given the tools of that practice. Therefore, this privilege debate is an unfortunate distraction from the more fundamental questions of whether accountants should be permitted to provide these tax services in the first instance, and if so, what licensing conditions should be imposed.