BILL ANALYSIS
AB 129
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Date of Hearing: April 27, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 129 (Ma) - As Introduced: January 16, 2009
2/3 vote. Urgency. Fiscal committee.
SUBJECT : Confidentiality: taxpayer communications.
SUMMARY : Re-enacts a statute, which was inadvertently allowed
to sunset on January 1, 2009, to expand the application of the
attorney-client confidential communication privilege to
specified communications between a federally authorized tax
practitioner (TP) and a taxpayer, where the practitioner is
representing the taxpayer on a tax matter before certain state
agencies. Specifically, this bill :
1)Provides that, with respect to tax advice, 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 TP.
2)Specifies that the communication between a taxpayer and any
federally authorized TP would be privileged to the extent that
the communication would be considered privileged if it were
between a client and an attorney.
3)Defines "a federally authorized tax practitioner" as an
individual who is authorized, under federal law, to practice
before the Internal Revenue Service (IRS), if the practice is
subject to federal regulation under United States (U.S.) Code
Section 330 of Title 31, as provided by federal law as of
January 1, 2000.
4)Defines "tax advice" as advice given by an individual with
respect to a state tax matter, which may include federal tax
advice if it relates to the state tax matter.
5)Defines "federal tax advice" as advice given by an individual
within the scope of his/her authority to practice before the
IRS on non-criminal tax matters.
6)Specifies that the confidentiality privilege described above
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only applies to non-criminal tax matters before the State
Board of Equalization (BOE), the Franchise Tax Board (FTB),
and the Employment Development Department (EDD).
7)Provides that the confidentiality privilege does not apply to
any written communication between a federally authorized TP
and a director, shareholder, officer, employee, agent, or
representative of a corporation in connection with the
promotion of the participation of the corporation in any tax
shelter or in any proceeding to revoke or otherwise discipline
any license or right to practice by any government agency.
8)Defines "tax shelter" as a partnership or other entity, any
investment plan or arrangement, or any other plan or
arrangement if a significant purpose of that partnership,
entity, plan, or arrangement is the avoidance or evasion of
federal income tax.
9)States that this bill applies only to communications made on
or after the effective date of this bill.
10)Declares that this bill is an urgency measure that shall go
into effect immediately.
EXISTING FEDERAL LAW :
1)Authorizes the Secretary of the Treasury to regulate the
practice of taxpayer representatives before the Treasury and
provides that individuals "authorized to practice" before the
IRS may include attorneys, certified public accountants,
enrolled agents, and enrolled actuaries.
2)Extends the attorney-client confidentiality privilege to tax
advice furnished to a taxpayer by an individual who is
authorized to practice before the IRS. [Internal Revenue Code
(IRC) Section 7525].
3)Provides that the attorney-client privilege applies to a
communication between a taxpayer and a federally authorized TP
to the extent that the communication would be considered a
privileged communication if it were between a taxpayer and an
attorney. [IRC Section 7525(a)(1)].
4)Limits the federal attorney-client privilege to any
non-criminal tax matter before the IRS and non-criminal tax
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proceeding in Federal court brought by or against the U.S.
[IRC Section 7525(a)(2)].
5)Specifies that the privilege does not apply in the case of tax
shelters.
EXISTING STATE LAW:
1)Afforded, in modified conformity with the federal income tax
laws, from January 1, 2001, through January 1, 2009, the
confidentiality privilege to federally authorized TPs
representing California taxpayers in disputes before the BOE,
FTB, or EDD. [AB 1016 (Briggs), Chapter 438, Statutes of 2000
(AB 1016); AB 1416 (Vargas), Chapter 412, Statutes of 2004)
(AB 1416)].
2)Limited the application of that tax practitioner-client
privilege only to the provision of "tax advice" and did not
extend its application to tax matters in court or to tax
advice pertaining to a "tax shelter". As with the federal
provision, confidentiality was allowed to the extent to which
the communications would be privileged if they occur between a
client and an attorney.
3)Repealed the privilege on January 1, 2009.
FISCAL EFFECT : The FTB staff and BOE staff estimate that this
bill will not impact state tax revenues.
COMMENTS :
1)The author states that, "Enrolled Agents are tax practitioners
licensed by the U.S. Department of the Treasury to represent
taxpayers before all administrative levels of the Internal
Revenue Service (IRS) and state taxing authorities. Section
7525 of the Internal Revenue Code was enacted as part of the
IRS Restructuring and Reform Act of 1998, and it applies (with
limitations) to communications of tax advice between the
federally authorized tax practitioner and the client that
would otherwise be a protected privileged communication
between the taxpayer and an attorney.
"This section was inadvertently allowed to sunset in December
2008. The law protects the confidentiality of client-tax
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representative communications so that the tax representative
can successfully provide representation to the client.
Nonconformity between state and federal laws relative to
privileged communications between tax practitioners and client
taxpayers prevents California taxpayers from taking advantage
of the protections of confidential and privileged
communications that they are entitled to by federal law. The
2008 sunset was established by AB 1416 (Bermudez) in 2004.
"AB 129 would prevent the situation where a California tax
agency receives documents that are confidential for federal
purposes, but not confidential for state purposes.
"AB 129 reinstates conformity of California law with Federal law
that provides confidential communications between an Enrolled
Agent and [his/her] client."
2)This bill is sponsored by the California Society of Enrolled
Agents and the California Society of Certified Public
Accountants (CPA). The sponsors assert that nonconformity
between state and federal laws undermines the intent of the
1998 Federal Taxpayer Bill of Rights for California taxpayers
because information disclosed to FTB, BOE, and EDD is no
longer privileged and is available to the IRS through the
information sharing program between FTB and IRS. The sponsors
also point out that existing federal confidentiality privilege
is limited only to tax advice, other than advice relating to
tax shelters, and applies only in non-criminal situations.
3)The Committee staff notes all of the following:
a) Federal tax practitioner-client privilege. With the
passage of the IRS Restructuring and Reform Act of 1998,
any individual TP, when representing taxpayers on tax
matters before the IRS or in non-criminal court
proceedings, is now allowed the same confidential
communication privilege that applies to communications
between an attorney and a client. This privilege may not
be asserted to prevent the disclosure of information to any
regulatory body other than the IRS, including in an
administrative or court proceeding. In response to the
1998 federal change, California added a provision in 2000
to state law to allow, until January 1, 2005, the same
practitioner-client privilege to federally authorized TPs
representing California taxpayers (AB 1016). In 2004, its
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operation was extended until January 1, 2009 (AB 1416).
The provisions of the California confidentiality privilege
were, inadvertently, allowed to sunset on January 1, 2009.
In contrast to the federal law, the application of the
California privilege was more limited because it was not
extended to tax matters in court and was not permanent.
b) Does the privilege apply to preparation of tax returns?
The consensus among tax attorneys and practitioners is that
a communication in connection with tax return preparation
is not covered by the federal tax practitioner-client
confidentiality privilege. Therefore, it appears that the
privilege proposed by this bill is limited to provision of
tax advice only and does not apply to communications
relating to tax return preparation.
c) Non-conformity with federal privilege provisions . As
highlighted by the sponsors, the federal tax
practitioner-client privilege may be destroyed in some
cases if California does not conform to federal law. For
example, if a taxpayer relies on the federal privilege,
which is not available at the state level, California's tax
agencies could obtain documents and information from a
taxpayer that are confidential for federal, but not state,
purposes and share them with federal officials.
d) Should the privilege apply to tax matters in state
courts ? This bill has been double-referred with the
Judiciary Committee. As noted by the Judiciary Committee's
analysis of AB 129, there is no other statute that extends
a privilege usually afforded in judicial proceedings only
to an administrative hearing. If the privilege is vital to
the rights of the taxpayer, why would it extent only to
administrative hearings and not to judicial proceedings?
The federal tax practitioner-client confidentiality
privilege applies to communications between the
practitioner and his/her client in any non-criminal tax
proceeding in federal court brought by or against the U.S.
This Committee's staff questions the reason for limiting
the California tax practitioner-client privilege only to
administrative proceedings because, arguably, the state's
privilege would not apply in a judicial proceeding even if
the subject communication originated in the context of a
tax-related matter in an administrative proceeding. AB 129
passed out of the Judiciary Committee by a vote of 9 to 0
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on March 31, 2009. For a more comprehensive discussion of
this bill, refer to that committee's analysis.
e) Is the sunset date needed ? The author and the sponsors
seek to re-enact the former tax practitioner-client
privilege provision and remove the sunset entirely, thus,
making the privilege permanent. Usually, a sunset is added
to a bill in order to allow the Legislature to revisit the
necessity and effectiveness of the legislation, or address
any unintended consequences. The provisions related to the
authorized tax practitioner-client privilege had been in
existence for nine years prior to January 1, 2009, and none
of the state's tax agencies have reported any serious
problems with the confidentiality provisions. Therefore,
considering the limited scope of the California tax
practitioner-client privilege proposed by AB 129, Committee
staff recommends that the application of this privilege be
extended permanently, as it was done by Congress for the
federal tax practitioner-client privilege in 1998.
4)The BOE staff notes that, since enactment of these provisions,
there has been no adverse impact on BOE proceedings. The BOE
staff states that, "Although there was at least one instance
where, prior to enactment of this original provision in 2000,
a taxpayer could have successfully prevented the Board from
viewing a letter at a Board hearing, which may have precluded
the imposition of fraud and failure to file penalties, there
has not been any adverse impact on Board proceedings since
these provisions were first added to the law in 2000."
5)The FTB staff notes some implementation concerns relating to
the definition of a "tax shelter" and suggests revising this
bill to refer to "potentially abusive tax avoidance
transactions". The FTB staff also highlights the fact that
this bill contains references to obsolete sections in the
Revenue and Taxation Code. The author is working with FTB
staff to resolve those issues and concerns and intends to
amend this bill in Committee on April 27, 2009.
REGISTERED SUPPORT / OPPOSITION :
Support
The California Society of Enrolled Agents
AB 129
Page 7
The California Society of CPAs
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098