IRS Strikes Blow Against Attorney-Client Privilege

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When does the Internal Revenue Service's right to prevent participation in abusive tax shelters take precedence over the age-old right of attorney-client privilege? A nation of lawyers and accountants is biting its collective nails waiting to find out the answer.

On Thursday, The U.S. Justice Department asked a federal court in Illinois to force the Chicago office of Dallas-based law firm Jenkens & Gilchrist to turn over the names of clients who invested in certain abusive tax shelters sold by the firm. The IRS is attempting to obtain similar information from several accounting firms, including BDO Seidman, PricewaterhouseCoopers, KPMG, Ernst & Young, and the now defunct Arthur Andersen. This is the first such action against a law firm.

Earlier this week it was reported that approximately 100 clients of accounting firm BDO Seidman are asking the Chicago-based U.S. Court of Appeals for the Seventh Circuit to reconsider a ruling against that firm. The Court had ruled previously that the firm must turn over information about tax shelter participants to the IRS.

The legal actions are part of an IRS crackdown on abusive tax shelters and the firms that market and sell these shelters.

Jenkens & Gilchrist has stated that it will fight the IRS and not relinquish information about its clients. "Our clients expected confidentiality when they sought legal advice concerning their taxes," the firm said in a statement.

The Justice Department argues that the firm was going behind the limits of providing legal advice when it encouraged clients to purchase interests in tax shelters. The government is taking the position that attorney-client privilege does not apply in this type of situation. The IRS has indicated it will conduct audits of taxpayers who participated in the abusive shelters.

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