The Kovel Rule - Lawyer-Client Confidentiality

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Definition:

The Kovel Rule is an extension of the long-established legal principle of lawyer-client confidentiality (or lawyer-client privilege), including other experts, like accountants, who might be consulted either directly by clients or indirectly, through the clients' own lawyers. Such experts, in certain scenarios, conceivably could include financial advisors or financial planners. As a result, all such financial professionals (and their clients) should be cognizant of the potential ramifications of discussing legally sensitive topics.

The Kovel Rule takes its name from Louis Kovel, an IRS agent who later joined a law firm specializing in tax cases, lending his expertise in tax accounting. In 1961, Kovel was sentenced to prison for refusing to answer questions in court about discussions with a client, which he believed to be protected by the principle of lawyer-client privilege. His conviction was overturned upon appeal.

In recent years, the IRS has won several key decisions in the federal courts that limit the extent of the protections afforded to clients under the Kovel Rule. The upshot is that clients are becoming less frank in their discussions with tax counsel which, in turn, makes it more difficult for the latter to give sound recommendations.

In particular, a 2010 case established the precedent that the Kovel Rule does not apply in situations involving criminal activities such as fraud and tax evasion.

The bottom line is that an accountant's advice in a tax case is not automatically protected by the confidentiality principle, even if the accountant has been been formally engaged in writing by a lawyer.

Ensuring that it is requires much more detailed legal maneuvers. Some states, meanwhile, are more protective of accountant-client discussions than the federal government.

Source: "Why Your CPA Might Blab," The Wall Street Journal, 6/18/2011.

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