Caroline D. Ciraolo and Bryan C. Skarlatos quoted in Tax Notes article entitled "Texas Law Firm Must Comply With IRS John Doe Summons"

Caroline D. Ciraolo and Bryan C. Skarlatos were quoted in Tax Notes article entitled "Texas Law Firm Must Comply With IRS John Doe Summons,” regarding a recent Fifth Circuit ruling upholding an order “requiring a Texas law firm to turn over information on clients with offshore structures in response to an IRS John Doe summons,” according to the article.

Excerpts from the article are below:

Caroline D. Ciraolo of Kostelanetz & Fink LLP pointed out that voluntary compliance relies on the ability of taxpayers to consult with tax professionals to understand and navigate a complex and often confusing tax code.

“If taxpayers doubt that their communications will be kept confidential, many will turn to self help, make costly mistakes, and may even fall prey to the unscrupulous advisers that enable noncompliance and increase our country’s tax gap,” said Ciraolo, a former principal deputy assistant attorney general in the Justice Department Tax Division.

According to Ciraolo, while the IRS must be empowered to administer the tax laws and hold accountable those who seek to evade their tax and reporting obligations, “decisions to issue summonses or subpoenas to law firms for client files must be the exception, not the rule,” she said. “Such demands must be narrowly tailored and require careful consideration of the communications at issue,” she added.

According to Bryan C. Skarlatos of Kostelanetz & Fink, one of the major hurdles faced by Taylor Lohmeyer was carrying its burden of proof that the attorney-client privilege applied to every single document requested.

“Blanket claims of privilege are very difficult to prove,” said Skarlatos. To carry that burden, he explained, the firm would have had to provide some kind of privilege log, either document by document or by categories of document, and demonstrate why producing each document or category of documents would reveal an otherwise privileged communication.

“While a privilege log would have been very difficult and time-consuming to produce in this case, it may have made a difference with respect to at least some of the documents,” said Skarlatos. “Essentially, the Fifth Circuit held that the firm did not carry its burden in this case.”

The court’s decision should serve as a reminder to law firms on several fronts, Skarlatos said. The IRS and Justice Department are aggressively pursuing transactions perceived to enable taxpayers to improperly reduce their tax liability or ignore their reporting obligations, and they will continue to use all available tools to obtain information they think are needed to identify noncompliance, he said.

Skarlatos noted that Justice Department representatives have said they won’t shy away from challenging assertions of the attorney-client privilege in appropriate cases. “This is a developing area of the law, and law firms should be sensitive to privilege issues at the outset of the client relationship and, when appropriate, explain to clients the extent of the privilege, where it does and does not apply, the steps necessary to preserve the privilege, and the actions that result in waiver of the privilege,” said Skarlatos.

Law firms should offer regular training to their lawyers regarding the scope of privilege, circulate recent decisions to keep the attorneys and others at the firm aware of current developments, and institute practices and procedures to ensure the integrity of client files, Skarlatos said.

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Click here for Decision from U.S. Court of Appeals for the Fifth Circuit