Reliance on a tax professional can constitute reasonable cause, and thus avoid the application of an accuracy-related penalty under Code §6662 or a fraud penalty under Code §6663. When the professional is an attorney, case law indicates that this reliance waives the attorney-client privilege so that the government can determine if such reliance occurred and met the reasonable cause exception. See New Phoenix Sunrise Corp. v. C.I.R., 106 AFTR 2d 2010-7116 (CA 6 2010) and Ad Investment 2000 Fund, LLC, 142 TC 248 (2014).
So will the mere assertion of a reasonable cause defense result in waiver of the privilege? Not according to the U.S. District Court in a recent case. There, the court noted:
the “reasonable cause” defense in a pleading does not lead to the automatic disclosure of privileged documents. Ad Investment 2000, 142 T.C. at 258-59. It merely gives the Commissioner grounds to compel the production of documents subject to the attorney-client privilege. Id.; see also Tax Court Rules 70, 72. Even when such a motion to compel is well-taken, case law suggests that disclosure may not result. For example, in Ad Investment 2000, the Tax Court found that the petitioners had waived their attorney-client privilege by putting protected communications at issue, and ordered the petitioners to produce the privileged documents. Id. However, the Tax Court simultaneously indicated that the petitioners could still protect their documents from disclosure by abandoning their “reasonable cause” defense.... (stating that, if the petitioners “persist, they sacrifice the privilege to withhold the contents of the opinions”).
While the case involved the circumstance of the pleading being filed in a separate case, the reasoning should equally apply when the pleading is within the instant case.
U.S. v. Micro Cap Ky Insurance Company, Inc., 119 AFTR2d 2017-XXXX (DC Ky 3/27/17)