BILL ANALYSIS
AB 129
Page 1
Date of Hearing: March 31, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 129 (Ma) - As Introduced: January 16, 2009
SUBJECT : Confidentiality: Taxpayer Communications
KEY ISSUE : Should confidential communications between a tax
practitioner and a taxpayer, where the former is representing
the latter on a matter before a state agency, have the same
privileged protection as a communication between an attorney and
a client?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill re-enacts a statute that was inadvertently allowed to
sunset on January 1, 2009. Under federal law, "an authorized
tax practitioner" (which can include an attorney, a CPA, or an
enrolled agent) is permitted to represent taxpayers before the
Internal Revenue Service (IRS) and in federal court and in
non-criminal matters brought by or against the United States.
In 1998, authorized tax practitioners, when representing tax
payers on tax matters before the IRS or in non-criminal court
proceedings, were given the same confidential communication
privilege that applies to communications between a lawyer and a
client, even when the tax practitioner was not a licensed
attorney. The rationale for this rule is apparently that the
tax practitioner, whether an attorney or not, is for purposes of
representation on certain tax matters the functional equivalent
of an attorney. In 2000 a similar provision was added to
California law extending the confidential communication
privilege to authorized tax practitioners representing taxpayer
on tax matters before certain state agencies. That measure
contained an original sunset date of 2005, and in 2004 that
sunset was extended to January 1, 2009. Because the sunset has
now expired, the author and sponsor seek to re-enact the former
provision and remove the sunset entirely, making the privilege
permanent. The bill is sponsored by the California Society of
Enrolled Agents. Though there is no known opposition to the
bill, the analysis raises several questions for possible
discussion with the sponsor.
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SUMMARY : Re-enacts a recently expired statute that had expanded
the lawyer-client confidential communication privilege to
specified communications between a federally authorized tax
practitioner and a taxpayer, where the practitioner is
representing the taxpayer on a tax matter before certain state
agencies. Specifically, this bill :
1)Provides that the protections of confidentiality that apply to
a communication between a client and an attorney shall also
apply to a communication between a taxpayer and any federally
authorized tax practitioner, as defined, to the extent that
the communication would be considered privileged if it were
between a client and an attorney.
2)Provides that the privilege described above only applies to
non-criminal tax matters before the State Board of
Equalization, the Franchise Tax Board, and the Employment
Development Department.
3)Provides that the confidentiality privilege does not apply to
an written communication between a federally authorized tax
practitioner and a director, shareholder, officer, employee,
agent, or representative of a corporation in connection with
the promotion of the direct or indirect participation of the
corporation in any tax shelter, as defined, or in any
proceeding to revoke or otherwise discipline any license or
right to practice by any government agency.
4)Specifies that the provisions of this bill are only operative
for communications made on or after the effective date of this
bill.
5)Declares that this is an urgency measure that shall go into
effect immediate.
EXISTING LAW :
1)Provides under federal law that, with respect to tax advice,
the same common law protections that apply to a communication
between a taxpayer and an attorney shall also apply to a
communication between a taxpayer and a federally authorized
practitioner to the extent the communication would be
considered a privileged communication if it were between a
taxpayer and an attorney. (Internal Revenue Code Section 7525
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(a)(1).)
2)Limits the federal privilege described above to any
non-criminal tax matter before the Internal Revenue Service;
and non-criminal tax proceeding in Federal court brought by or
against the United States. (Id. Section (a)(2).)
COMMENTS : In 1998 Congress passed the Internal Revenue Service
(IRS) Restructuring and Reform Act (Pub. L. 105-206, title III,
112 Stat. 750). This Act added section 7525 to the Internal
Revenue Code as a part of the Taxpayer Bill of Rights. Section
7525 extends the common law's attorney-client confidential
communication privilege to certain communications between an
"authorized tax practitioner" and a taxpayer. Under this
federal law, the confidentiality privilege is limited to tax
advice, other than advice regarding tax shelters, and applies
only in non-criminal matters, including administrative hearings
before the Internal Revenue Service and tax proceedings in
Federal court brought by or against the United States.
"Authorized tax practitioners" include attorneys, certified
public accountants, enrolled agents, and enrolled actuaries.
According to the commentary on section 7525, this provision
allows taxpayers to consult with qualified tax professionals in
the same manner as they consult with tax professionals who also
happen to be licensed attorneys. Extending a privilege that has
historically only applied to attorney-client to other
professionals, such as CPAs, apparently reflects the fact that,
in this limited context, the CPA or other non-attorney is acting
as the functional equivalent of an attorney when representing a
taxpayer in a tax dispute before the IRS, or in some cases in a
federal court.
In response to the 1998 federal change, AB 1016 (Chapter 438,
Stats. of 2000) added a provision to state law to afford the
same privilege to authorized tax practitioners representing
California taxpayers in disputes before the state Board of
Equalization, Franchise Tax Board, or Employment Development
Department. AB 1016 included an original sunset date of January
1, 2005. In 2004, AB 1416 (Chapter 412, Stats. of 2004)
extended the sunset to January 1, 2009. According to the
legislative history of these earlier bills, California CPAs and
enrolled agents argued that the privilege was necessary to
protect taxpayers and to make state law conform to federal law.
Although federal law did not require state compliance, the
supporters of the previous legislation argued that a lack of
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conformity with federal law was "problematic because the state
commonly shares tax information with federal officials. Thus if
a taxpayer relies on the federal confidentiality provisions with
his or her tax practitioner, but confidentiality provisions are
not available at the state level, California's tax agencies
could obtain documents and information from a taxpayer that are
confidential for federal purposes but not state purposes and
share them with federal officials." (Assembly Floor,
Concurrence in Senate Amendments, AB 1416, August 11, 2004.)
According to the author and sponsor, this bill seeks to reenact
legislation that was inadvertently allowed to sunset on January
1, 2009. This bill would make the provision permanent and is an
urgency measure to take effect immediately.
ARGUMENTS IN SUPPORT : The California Society of Enrolled
Agents, the sponsor, argues that state law, like federal law,
should "protect the confidentiality of client-tax representative
communications so that the tax representative can successfully
provide representation to the client." The sponsor also argues
that lack of conformity between state and federal law
effectively denies California taxpayers from taking advantage of
the federal protections, since confidential communications that
must be disclosed before a state agency could then be used in a
federal proceeding where such communications would have been
privileged.
The California Taxpayers' Association supports AB 129 because
"ensuring taxpayer/practitioner confidentiality allows for more
candid discussions between tax payers and their tax
professionals without fear of subsequent legal reprisal. Such
candor between client and practitioner is imperative to ensure
accurate reporting and disclosure before the taxing agencies."
Although there is no opposition to the bill at this time, the
Committee may wish to ask the author and/or sponsor the
following questions:
Why was the sunset instituted in the prior bills? And does
experience justify making this measure permanent? That is,
usually a sunset is added to a bill in order to allow the
Legislature to revisit the necessity and effectiveness of the
legislation, or to address any unintended consequences. Yet
there is nothing in the background material speaking to how
this measure has worked in practice or even how often, if
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ever, it is invoked. Given the rationale for making state law
mirror federal law, have there been any instances in which a
practitioner or taxpayer was forced to divulge confidential
communications to a state agency that were then subsequently
used in a federal proceeding?
Similarly, does the issue that this bill seeks to address
arise often enough to justify extending a privilege rooted in
the attorney-client relationship to other professional
relationships? Representatives from both the State Board of
Equalization and the Franchise Tax Board, while not taking a
position on the bill, informed the Committee that hearings
before those agencies are conducted in such a way that this
issue almost never comes up, and neither spokesperson of
either agency knew of or could recall an instance where the
privilege was invoked.
If the privilege is vital to the rights of the taxpayer, why
would it extend only to administrative hearings and not to
judicial or criminal proceedings, where presumably the stakes
are higher? The Committee knows of no other statute that
extends a privilege usually afforded in judicial proceedings
only to an administrative proceeding. It is more often the
case that privileges can be asserted in a court of law,
especially in a criminal matter, but are not always permitted
in an administrative hearing.
REGISTERED SUPPORT / OPPOSITION :
Support
California Society of Enrolled Engineers (sponsor)
California Taxpayers Association
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334