An attorney may need an accountant’s help to understand certain financial or tax problems that impact legal advice to a client. However, clients should be cautious when they seek the opinions of outside accounting experts if they hope to preserve the attorney-client privilege. Federal common law does not recognize an accountant-client privilege that protects communications disclosed between a client and an accountant. Thus, if counsel needs an accounting firm’s assistance in providing legal advice, they must follow the Kovel doctrine to protect the accountant’s work and communications among the attorney, accountant, and client as privileged and confidential.

A. The Kovel Doctrine

In United States v. Kovel, a defendant’s accountant refused to answer questions concerning his work for the clients of the law firm that employed him and was held in contempt.¹ Because the accountant was frequently included in conversations between the firm’s lawyers and its clients, the court believed the accountant possessed relevant information to the grand jury regarding one of the firm’s clients. The accountant asserted the attorney-client privilege in refusing to answer questions for the grand jury and the district court ruled that the accountant had no right to assert privilege even though he was an employee of the law firm. However, the Second Circuit rejected the district court’s view asserting that the privilege must include all persons who act as the attorney’s agents, such as a foreign language translator. In describing an accountant as a translator who assists an attorney in understanding complex accounting and tax matters relating to the representation of the attorney’s client, the court emphasized that communications involving an accountant may be protected by the privilege so long as the purpose of the communication is for the client to receive legal advice from the lawyer rather than to obtain accounting or other advice from the accountant.

The Kovel doctrine, while not recognized by all courts, has been acknowledged and adopted in the Eighth Circuit,² and has been implicated in Nebraska statutory law.³ The doctrine applies when counsel—and not the client—retain the accountant to interpret and analyze information so that counsel can provide legal advice to the client.

In considering whether the Kovel doctrine applies, courts will consider six factors.

1. Whether the third party assisted the attorney in providing legal advice. In determining whether the third-party accountant assisted an attorney in providing legal advice, the court will examine the specific facts of the case. For example, in United States v. Cote, the Eighth Circuit held that the attorney-client privilege protected an accountant’s work-product prepared at the behest of an attorney to assist in advising a taxpaying client in anticipation of an IRS investigation.⁴ The attorney hired the accountant to audit the taxpayer’s books and records, then used the accountant’s work-product to support his conclusion that the taxpayer should file amended returns disclosing an increase in taxable income. Because the accountant’s work-product was prepared for the purpose of assisting the attorney in providing legal advice, the Eighth Circuit considered the work-product protected by the attorney-client privilege.
2. Whether the third party provided advice directly to the client. Courts have ruled that the Kovel doctrine does not apply when the accountant is providing legal advice to a client rather than to an attorney.⁵ In United States v. Adlman, the Second Circuit held that the district court did not abuse its discretion in concluding that the corporation failed to demonstrate that it came within the principle of Kovel when the facts supported a finding that the corporation consulted an accounting firm for tax advice, rather than the corporation’s counsel consulted the tax firm for support in reaching a better understanding to provide legal advice to the corporation.
3. Whether the communications involving the third party were for the purpose of tax return preparation. Communications involving accountants are not ordinarily considered privileged under the Kovel doctrine if they relate to the preparation or filing of tax returns because the Kovel doctrine requires that the information seeking to be protected is intended to be confidential. Further, an accountant preparing a client’s tax return will not likely be considered analogous to a translator or interpreter, but rather such preparation is an accounting service and not generally subject to privilege.⁶
4. Whether the third party served as a translator or merely provided facts. As noted above, an accountant serving as an agent to an attorney to provide explanation or interpretation will generally be subject to privilege in its communications.
5. Whether the attorney directed the actions of the third party. An attorney who retains an accountant to assist them in understanding their client’s problems and directs the actions of the accountant will be treated more favorably on a claim of privilege under Kovel.⁷ On the other hand, when the accountant is acting at the direction of the client, courts will be less likely to consider the communications privileged.⁸
6. Whether the attorney had an independent understanding of the third party’s area of expertise. If an attorney is capable of advising its client sufficiently without the help of an accountant, courts may consider the communications involving the accountant to be not privileged. Thus, if an attorney has subject-matter expertise in a particular field, courts may be less willing to apply the Kovel doctrine to communications provided by a third party in the same field.⁹

B. The Kovel Letter

In asserting privilege under the Kovel doctrine, the attorney, client, and third-party accountant should memorialize their relationship in an engagement letter—known as a Kovel letter—to establish the privileged nature of the communications with the third party.

Among other things, the Kovel letter should include:

1. a provision for payment of the accountant by the attorney;
2. a provision clarifying that the attorney is hiring the accountant to assist the attorney in providing legal advice;
3. a determination of the scope of the accountant’s duties as an agent to the attorney;
4. a determination that the work produced by the accountant will be the sole property of the attorney; and
5. a determination that upon execution of the accountant’s duties, all work produced will be delivered to and retained by the attorney—not the accountant.

A Kovel letter in isolation will not ensure privilege. In order to best ensure the Kovel letter establishes privilege, the conduct of the attorney, client, and third party should satisfy the elements of the Kovel doctrine above, in addition to conduct that demonstrates the communications are confidential.

Any time a client needs assistance with a tax controversy or other issue that could potentially lead to litigation, accountants and other advisors should consider whether a Kovel arrangement would be wise. If the situation warrants it, practitioners should work closely with counsel to put a Kovel arrangement in place and to conduct themselves accordingly.