IRS Noises About Attacking Kovel Arrangements

Tax controversy attorneys often engage accountants to assist them in providing legal services to a client of the attorney facings civil or criminal tax investigation. This arrangement is called a Kovel agreement, named after the leading case recognizing it -- United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). The IRS is now noising about testing the limits of the Kovel arrangement. An article in today's Tax Notes Today (Sam Young, Government Will Subpoena Accountants in Criminal Tax Prosecutions, Official Warns, 2010 TNT 91-4), although somewhat cryptic, seems to be consistent with the rumors we have heard in this regard. I should note, however, that, since this initiative -- if that is the right word for it -- is so fresh, there does not appear to be a definitive statement of the IRS's concern or its theories for avoiding a properly implemented Kovel arrangement. I suspect that the IRS will not be able to pierce a properly implemented Kovel arrangement, but I do suspect that there are arrangements under the guise of Kovel that exceed the limits of the construct on which Kovel is based. Readers wanting to pursue this matter further may click here for a more detailed discussion from the current update draft of my Tax Procedure book. Readers may also want to visit Phil Hodgen's excellent blog discussion of this same issue here.