BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 129
Assemblymember Ma
As Amended May 4, 2009
Hearing Date: June 16, 2009
Revenue and Taxation Code; Unemployment Insurance Code
KB:jd
SUBJECT
Confidentiality: Taxpayer Communications
DESCRIPTION
This bill would reenact a recently expired statute which created
a limited attorney-client confidential communication privilege
applicable 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.
BACKGROUND
In 1998, Congress passed the Internal Revenue Service (IRS)
Restructuring and Reform Act (Pub. L. 105-206, title III, 112
Stat. 750), enacting Section 7525 to the Internal Revenue Code
(I.R.C.) as a part of the Taxpayer Bill of Rights. Section 7525
extended the traditional attorney-client privilege of
confidentiality to communications with respect to tax advice
between a taxpayer and a federally authorized tax practitioner.
Under this federal law, the confidentiality privilege is limited
to tax advice, other than advice regarding tax shelters, and
applies only in non-criminal proceedings, including
administrative hearings before the Internal Revenue Service and
tax proceedings in federal court brought by or against the
United States.
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
(more)
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historically only applied between attorneys-clients to Certified
Public Accountants (CPAs), apparently reflects the fact that, in
this limited context, the CPA 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 enactment of Section 7525, the Legislature
enacted AB 1016 (Briggs, Chapter 438, Statutes of 2000), which
afforded the same privilege of confidentiality 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 a sunset
date of January 1, 2005. In 2004, AB 1416 (Bermudez, Chapter
412, Statutes of 2004) extended the sunset to January 1, 2009.
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 permanently reenact the taxpayer confidentiality
provisions that sunset on January 1, 2009, and would take effect
immediately as an urgency measure.
CHANGES TO EXISTING LAW
Existing federal law provides 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. (I.R.C. Sec. 7525 (a)(1).)
Existing federal law limits the 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. (I.R.C. Sec. 7525 (a)(2).)
This bill would provide 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
tax practitioner.
This bill would specify that the communication between a
taxpayer and any federally authorized tax practitioner would be
privileged to the extent that the communication would be
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considered privileged if it were between a client and an
attorney.
This bill would provide that a federally authorized tax
practitioner has the legal obligation and duty to maintain
confidentiality with respect to such communication.
This bill would define 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
Code, Section 330 of Title 31, as provided by federal law as of
January 1, 2000.
This bill would define "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.
This bill would define "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.
This bill would specify that the confidentiality privilege
described above 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).
This bill would provide that the confidentiality privilege does
not apply to any written communication between a federally
authorized taxpayer 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.
This bill would define "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.
This bill would provide that the provisions of this bill apply
only to communications made on or after the effective date of
this bill.
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COMMENT
1. Stated need for the bill
The author states:
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.
However, this section was inadvertently allowed to sunset in
December 2008. The law protects the confidentiality of
client-tax representative communications so that the tax
representative can successfully provide representation to the
client. Non-conformity 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. Because the state and federal
officials often share taxpayer information, 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 their client, to ensure that tax
representatives can fully represent their client in
proceedings.
2.This bill would reenact a limited confidentiality privilege
between taxpayers and tax practitioners
Unless otherwise provided by statute, no person has a privilege
to refuse to be a witness, refuse to disclose any matter or
refuse to produce any writing or object, or refuse that another
person be a witness or disclose evidence. (Evid. Code Sec.
911.) An evidentiary privilege permits an otherwise competent
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witness to refuse to testify and/or prevent another from
testifying. Privileges are policy exclusions, unrelated to the
reliability of the information involved, which are granted
because it is considered more important to keep that information
confidential than it is to require disclosure. (Evid. Code Sec.
910, Comment.) Thus, an applicable privilege protects against
the compelled disclosure of information no matter how relevant
it is to the issues. Because they tend to suppress otherwise
relevant evidence, the statutory privileges are strictly
construed. (Evid. Code Sec. 911, Comment; Sullivan v. Sup. Ct.
(Spingola) (1972) 29 Cal.App.3d 64.) Except as otherwise
provided by statute, the statutory privileges may be asserted in
all proceedings in which testimony may be compelled, such as
investigations, inquiries, and administrative proceedings, as
well as trials. (Evidence Code Secs. 901, 910; Sec. 910,
Comment; Southern California Gas Co. v. California Pub. Util.
Comm'n, (1990) 50 Cal.App.3d 31, 38.)
Currently, there is no accountant-client privilege under federal
or California law, thus communications between accountants and
their clients are generally not confidential. Section 7525 of
the I.R.C. instead provides a narrow confidentiality privilege
for communications pertaining to tax advice between federally
authorized tax practitioners and taxpayers. This federal
privilege is limited to noncriminal proceedings before the
Internal Revenue Service and any noncriminal proceeding in
federal court brought by or against the United States. In
addition, the privilege does not apply to written communications
regarding corporate tax shelters.
This bill would reenact a similar confidentiality privilege for
taxpayer communications that was originally enacted by AB 1016
in 2000, and eventually repealed on January 1, 2009 through a
sunset. As under federal law, this bill would not apply to
criminal proceedings. The confidentiality privilege would only
apply in noncriminal tax matters before the State Board of
Equalization, Franchise Tax Board, and the Employment
Development Department.
It is important to note that this bill would not create a
general accountant-client evidentiary privilege. Instead, it
would create a narrow confidentiality privilege for tax advice
in noncriminal administrative proceedings, thereby conforming
state and federal law.
3. This bill would no longer contain a sunset
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As previously discussed, this bill would reenact the former tax
practitioner-client confidentiality provision and remove the
sunset entirely, thus, making the provisions 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. In light
of the limited scope of the tax practitioner-client
confidentiality provisions proposed by AB 129, and the absence
of any reported problems, there is arguably no longer a need for
a sunset.
Support : California Taxpayers Association; California Chamber
of Commerce
Opposition : None Known
HISTORY
Source : California Society of Enrolled Agents; California
Society of Certified Public Accountants
Related Pending Legislation : None Known
Prior Legislation :
AB 1016 (Briggs, Chapter 438, Statutes of 2000) See Background.
AB 1416 (Bermudez, Chapter 412, Statutes of 2004) See
Background.
Prior Vote :
Assembly Judiciary Committee (Ayes 9, Noes 0)
Assembly Revenue and Taxation Committee (Ayes 8, Noes 0)
Assembly Appropriations Committee (Ayes 15, Noes 0)
Assembly Floor (Ayes 76, Noes 0)
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