Produced monthly for Clients & Friends of the Advisory Group Associates.  Our Mission. Sharing Solutions that deliver real value.

This “TAX TIPS NEWSLINE” is compiled by the founder of the Tax & Advisory firms, Frank L. Zerjav, CPA and team of Professional Tax Associates, and then it is sent by email each month because you need tax and compliance knowledge.  It’s a big part of your life and the entities that you operate.

The CPA firm engages in Strategic Tax Planning for business and real estate owners, professionals, investors and individuals. Our clients minimize their tax burden by appropriate proven strategies, which help them to keep more of what they earn. Advisory Group’s Tax Resolution Experts also engage in resolving tax problems with either Federal or State tax agencies for clients who need these specialized, proven solutions and options.  Our dedicated team of Professional Tax Advisors and Tax Resolution Experts do care; our primary objective is the well-being of clients, their family and their survivors, as well as their satisfaction with the work we do, while our goal is to be the best, not the biggest firm.


We will reopen Wednesday, July 6th.  The office will also be closed  Friday, July 1st @ 2:00 pm.

Fly our flag with pride and celebrate America’s birthday!

Inside this Month’s Issue

  • Tax Incentives to Invest in Business Stock
  • Tax & Advisory Services Offered
  • Tax Problem Resolution Solutions
  • Best Practices for Rental Property Owners
  • Finance Options to Fund a Fixer-Upper
  • Tax News
  • Tax Compliance Costs U.S. Taxpayers $409 Billion
  • Attorney-Client Privilege with Your Accountant Matters
  • Wide Range of Services Offered



Code Sections 1202 & 1244

The Internal Revenue Code contains several provisions that encourage investment in such businesses. One option is to purchase “small business stock;” however, certain rules must be followed.

A capital gain or loss may occur when stock is sold or exchanged. If the selling price is greater than the purchase price, the transaction results in a gain. If the selling price is lower than the purchase price, a loss occurs.

Losses on certain small business stock. The sale of stock at a loss usually generates a capital loss, which can only be deducted in any particular year to the extent of capital gains, plus $3,000 ($1,500). Fortunately, Congress recognizes that investors in small corporations often run more of a risk of loss. As a result, the Internal Revenue Code permits an individual to deduct, as an ordinary loss, a loss from sale or exchange, or from worthlessness, of “small business stock” (more commonly called “Code Sec. 1244 stock”) issued by a qualifying small business corporation. Unlike a capital loss, an ordinary loss may fully offset wage income, dividends, or similar “ordinary” income.

To qualify as stock entitled to an ordinary loss deduction (Section 1244 stock); stock must be issued by a domestic corporation that is a small business corporation at the beginning of the tax year in which the stock is issued. A corporation is a small business corporation if the total amount of cash and other property received by the corporation for stock, as a contribution to capital and as paid-in surplus, does not exceed $1 million. If this $1 million threshold is exceeded, only a portion of the corporation’s stock can qualify as Section 1244 stock.

In addition to being issued by a small business corporation, to prove that it is an active business rather than a quasi-holding company, two other corporate-level tests must be met to qualify the stock as Section 1244 stock:

  1. The small business corporation must have more than 50 percent of its aggregate receipts derived from noninvestment income; and
  2. It must be largely an operating company deriving more than 50 percent of its gross receipts from actual nonpassive sources. Investment income for this purpose includes only gross receipts derived from royalties, rents, dividends, interest, annuities, and sales or exchanges of stock or securities.

There are limits, however, to the tax advantages of using Section 1244 stock. The maximum amount deductible as an ordinary loss in any one year is $50,000 ($100,000 on a joint return). However, any excess may take advantage of carryback and carryover provisions. Corporations, estates and trusts are ineligible for tax-favored treatment. On the other hand, there is no downside to the upside of the tax provision under Section 1202 to shelter gain.

Gains on Qualified Small Business Stock. Special provisions within the Tax Code not only protect investors from the downside with Section 1244 stock; the Tax Code also provides favorable treatment on the upside for gains from investing in small business stock under Section 1202. For original issue stock acquired after September 27, 2010, individual investors may exclude 100 percent of the gain they realize on the disposition of qualified small business stock if it is held for more than five years. Unlike losses under Section 1244, a small business for purposes of sheltering gain is defined more broadly to include a corporation with gross assets of less than $50 million at issuance. The amount taken into account under this exclusion is limited to the greater of $10 million or ten times the taxpayer’s basis in the stock. The amount of gain eligible for the partial exclusion is subject to limits computed on a per-issuer basis.

Additionally, any investor (other than a non-S corporation) that has held small business stock for more than six months may elect to sell it and defer any gain to the extent that he uses the amount realized on the sale to buy, within 60 days of the sale, any stock that also qualifies as small business stock. The holding period of the stock purchased under this swap provision generally includes the holding period of the stock sold.

If you have any further questions about how “Section 1244” stock or “Section 1202 stock” might benefit your particular tax situation, please do not hesitate to contact us. The rules are a bit complicated, but the benefits of qualifying for these special provisions are significant.



Advisory Group Associates and their Tax & Advisory firms have practiced for nearly 40 years in St Louis County, Missouri, with clients nationwide, providing strategic tax planning and income tax return preparation for individuals, corporations, partnerships, fiduciary, trust, gift and tax exempt organizations, as well as Representation before the Internal Revenue Service and state tax agencies.

Our dedicated team of tax professionals help to identify prevention tactics and defenses for clients to avoid the financial devastation of additional tax, penalty, or interest assessments if a taxpayer is faced with an IRS audit controversy or other tax problem.  Their role includes using advanced examination techniques while protecting taxpayer’s rights and applying proven practices and methods. As result of such specialized tax problem resolution services, they have learned how to apply the best practices and proven methods while representing mostly high-net-worth clients who own a professional practice or business.  Frequently, resolution has been achieved even when the taxpayer believed that other possibilities were no longer available.

The Advisory Group Associates, Tax & Advisory firms continue to provide quality performance and results with the highest standards, core values, integrity and service excellence as tax and accounting professionals. They also provide a wide array of specialized non-traditional solutions including Entity Structuring, Asset Protection Solutions, Business & Tax Advisory, Proactive Accounting, including data and payroll processing, as well as Representation for Resolution of Tax Problems involving levy, liens, audit defense, payment plans, un-filed tax returns, penalty abatement and offers in compromise.

Their accomplishments are directly related to relationships, confidence, understanding, and the loyalty and support of nearly 2,000 clients who routinely refer their colleagues and friends.  A crucial aspect of the work performed by this motivated team of skilled and experienced professionals has been to dispel fears when dealing with the complexity of tax codes, compliance, and administration of taxing matters.



Every so often, a taxpayer will get behind in paying their federal and state income taxes.  The usual solution is to set up a payment plan so that the person can pay their taxes over a few years.  But sometimes, it becomes clear to taxpayers and their Tax Advisors that there is no mathematically feasible way to pay off all the taxes (as well as interest and penalties) over time.  That’s when it’s time to start thinking about alternative solutions.

Revisions to the Offer in Compromise Program

The IRS revised its Offer in Compromise program.  The IRS revised how the settlement amount is computed by projecting a taxpayer’s income over the next one to two years, instead of over four to five years.  The IRS has also revised how it evaluates various types of assets and expenses.  It’s too early for us to say how these changes will play out in real, but the IRS has made the program substantially more feasible.

Installment Agreements

The typical first step in trying to get caught up with payments to the IRS is to set up a payment plan, or as the IRS likes to call it, an installment agreement.  The IRS has recently become much more lenient here as well, by granting automatic approval to installment agreements where the outstanding tax debt is $50,000 or less and the amount will be paid in full in six years or less.

Partial Payment Installment Agreements

If the payment amount on a regular installment agreement isn’t affordable, the IRS may agree to a lesser monthly payment that is based on a taxpayer’s monthly income.  Unlike regular installment agreements, the payment terms are negotiated directly with the IRS after thoroughly reviewing a taxpayer’s income and expenses.

File Bankruptcy?

One option that people frequently ask about is whether they could discharge their taxes by filing for bankruptcy.  There are several criteria that come into play in determining whether taxes are dischargeable, and most of the criteria relate to how old the tax debts are.

With every IRS tax problem there is a solution.

For help, more information or specific advice regarding your situation, contact us by calling: 314-205-9595 or toll free 888-809-9595 for a reservation to schedule a complimentary consultation with our experienced Tax Resolution Experts.



Efficient rental property investment can hinge on how you structure your accounts, claim your expenses and pay your tax – don’t ignore this crucial step!

Have you been considering investing in rental property? Or perhaps you have an established portfolio, but it’s not performing the way it should. No matter what stage of the game you’re at, choosing the right Tax Advisor to handle your taxes can be the difference between growing your wea1th, developing a headache or not sleeping at night.

You might be wondering exactly what a Tax Advisor can do to make your property investment more profitable, and the answer is – a lot! Here’s a quick rundown of what you can expect from property related accounting and tax services.

What can my Tax Advisor do for me?

Your Tax Advisor has the power to make your investment property infinitely more valuable to you. Not only do they have years of experience in accounting, tax and property, they also have the time and resources to investigate and implement every legitimate tax saving they can possibly pass on to you. Aside from the benefits of time and know-how, an experience real estate Tax Advisor should also be properly qualified to perform their job.

There’s also the fact that your tax affairs are not simply erased and restarted every financial year. The Internal Revenue Service (IRS) actively looks for reporting that may be incorrect or false, so accurate record-keeping is your best line of defense. Not only can your Tax Advisor help you make sure you stay on the right side of the law using proven tax-smart strategies and opportunities to lower your tax burden and keeping more of what you earn, they also prepare all of the financial documentation that protects you if you ever need it.

These documents are also extremely handy if you are planning on increasing your portfolio with new assets – a bank or lender may look considerably more kindly on an investor that can show exactly what they’re doing with their money and what their overall financial standing is.  Again, experienced real estate Tax Advisors deliver outstanding value.

As experienced real estate taxation experts, our Tax Advisors are able to help you figure out all of the proper deductions for your investment property, and help you claim them against your rental income or other income stream to reduce your overall tax burden.

Tax Advisors also help investors by preparing tax returns, Strategic tax planning and providing advice on Entity (ownership) structures to ensure that your investment property is working for you and not the other way around.

Is tax-reduction a legitimate strategy?

Reducing the tax you pay claiming legitimate expenses paid and incurred through a wealth-creating asset is not only legal, it’s an established and highly recognized way to help everyday Investors grow their wealth.   At the same time, investment properties provide housing solutions – which is a benefit to the local community.

Tax Advisors provide guidance for rental property investors on how to treat rental income, expenses and other items. However, there are many regulations and rental property items that can have a bearing on your tax ability – so don’t make the mistake of trying to tackle this on your own, Unless you are an accountant, chances are you don’t have the time, knowledge or resources to make sure you are making the most of your investment property.

Your Tax Advisor can help you to reduce the amount of tax you pay on your property’s income and your personal salary, too.  All of the money saved by using tax-reduction strategies can be used for debt reduction or you may choose to retain your investment property as a cashflow positive investment to fund your retirement, or by putting it on the market when prices are high.

The future of your investment property

Whether you choose to buy more property in the future, sell an investment or keep what you currently have, your decision could greatly affect your retirement strategy or estate planning, but so can other factors.

Proper Entity and tax structuring for your investment property portfolio will help you to protect your assets and wealth you have built up for your family should anything adverse occur. This is particularly beneficial for those who are self-employed, business owners or professionals whose job also carries risk.

Efficient tax planning is not only concerned with making sure you take advantage of every opportunity available to you, it’s also about making sure you are never caught off guard when it comes to your wealth and financial prosperity.



Owning a fixer-upper can be a fun journey but not always easy. Besides not always having running water and never having central AC, you need to figure out how to finance all the repairs and improvements needed.

Going through this process has taught us quite a bit about options for financing a fixer-upper, too. And there are plenty of excellent options out there.  Buyers just aren’t aware of these options. If you’d like to purchase a fixer-upper, here are some great options to consider:

Cash or Credit Card.  Cash and credit cards seem like opposites.  But for our intents and purposes, you’d use cash or a credit card in similar situations. These are financing options only if the renovations you need to make are low-dollar projects.

You can do many value-adding renovation projects for a relatively small amount of money. For instance, painting is a cheap way to upgrade the look.  Or you could lay a new floor in a tiny bathroom to modernize it. These upgrades could cost just a couple thousand dollars.

In this situation, it probably doesn’t make sense to go through the lengthy second mortgage or refinancing process. Instead, you can either save up cash ahead of time or use a 0% introductory APR credit card to finance the renovation up front.

The best practice, if you use a credit card, be absolutely certain that it is paid off before you start having to pay interest. (As a reminder, Reward Points are tax-exempt income and many builders pay their subcontractors and supplies with credit cards).

If cash and credit would not be the best financing option for your renovation, especially if you’re planning several thousand dollars worth of renovations, then consider the following options:

A second mortgage.  Home Equity Line of Credit (HELOC) or home equity loan can both be decent options for financing minor renovations. A HELOC is a revolving loan on your personal residence, meaning it works like a credit card where you can spend up the line of credit and pay it down multiple times over the life of the loan.  Home equity loans, on the other hand, are fixed-rate, fixed-term loans.

That can sound a little scary, but using your personal residence as collateral gives you access to lower interest rates. Plus, interest you pay on a second mortgage may qualify for the mortgage interest tax deduction, just like interest paid on a regular 15- or 30-year mortgage.

A home equity loan can sound safer, however, look into a HELOC first. This is mainly because interest rates on HELOCs are so low right now.

When is a second mortgage a good option? If you have some equity built up in your personal residence and can pay off the cost of your fixer-upper within a few years, a HELOC might be a good option.  Since HELOCs usually have very little closing costs, this is also a good option if you know you’ll be in the market to sell soon.

If you’d prefer the stability and longer term of a home equity loan over a HELOC, you might consider other options instead: it can also help you tap into your personal residence’s current equity.

Cash-out refinancing.  With a cash-out refinance, you’ll refinance your personal residence’s and take cash out at closing. As with a second mortgage, this option will only work if you currently have equity in your home. Terms vary, but you can typically borrow up to between 80% and 90% of the current value of your home.

With a cash-out refinance, borrowers generally get a fixed rate, fixed term. You’re going to get low payments because you can go all the way out to 30 years on that.  This can free up cash for you to devote to other things, including investments or paying down higher-interest debt.

There are some cash out refinance options that have no closing costs. In this case, you’re basically rolling the costs you would have paid in closing into a slightly higher interest rate. If you’re not planning to keep the fixer-upper very long, a no closing cost loan could be a better option.

When is a cash-refinancing of your personal residence a good option? If you have equity built up in your home, a cash-out refinance can be a very solid option. If you have a decent credit score and maintain 80% equity, you’ll get a good interest rate and avoid paying private mortgage insurance (PMI).

Renovation (fixer-upper) loans.  Renovation loans are products that are designed specifically for fixer-uppers. They come in two main “flavors.”  The thing they have in common is that you actually borrow against your personal residence’s future appraised value, which gives you more money to work with for your fixer-upper.

This borrowing against the future value of the home works for new buyers, too. Say you find a fixer-upper on the market that’s currently worth $50,000 but would be worth $100,000 when you get finished with it. You could take out one of the mortgage types below for $90,000- $50,000 to go towards the purchase price of the home and $40,000 to go towards renovations.

Renovation loans, like the other financing options listed above, have their pros and cons. For one thing, (typically), they’re going to have a little bit higher interest rate, and they’re going to have a little bit higher closing costs.  This is true of both types of renovation loans, and it’s certainly something to consider when shopping for ways to make your fixer-upper a reality.

What are the types of renovation loans, and which could work best for your situation?

Fannie Mae Homestyle

This option allows you to borrow up to $417,000 for your fixer-upper. It’s a conventional loan, which means that credit requirements are somewhat strict, and you need a down payment. You can borrow more than 80% of the future value of the home, but you’re better off putting 20% down if possible.

The “HomeStyle” is the cheaper of these available renovation loan options. But it does have one major caveat: you can only utilize up to 50% of the home’s future value for renovations.  The loan comes with better interest rates, and you don’t have to pay PMI if you have at least 20% equity in your home.

FHA 203(k)

The 203(k) program is administered by the FHA, which means that it has lower credit requirements than the “HomeStyle” conventional loan. However, since it’s an FHA program, it has up front mortgage insurance premiums, and it has a monthly mortgage insurance premium that stays for the entire life of the loan.  The only way to escape paying monthly PMI on an FHA loan is to refinance later.

The FHA 203(k) loan has two different options in itself. One, a streamline or limited 203(k) will cover up to $30,000 in renovation costs, and renovations cannot include structural or health and safety renovations. The streamline loan is cheaper and easier to administer, since it doesn’t require several inspections during the renovation.

The regular or full 203(k) is more complicated, but it can cover any type of work, including structural renovations. With a full 203(k), the limit on the total mortgage amount varies by location.

You can also borrow up to 110% of your home’s future appraised value, though this isn’t recommended. Lenders prefer that you stay under 95% of the home’s future value.

When could Renovation (fixer-upper) loans be a good option? If you’re looking to make major renovations, and your property’s current state isn’t worth much, look into a renovation loan. The ability to borrow against future appraised value is an excellent avenue for major repairs, rehab and renovations.  Again, look into both loan options.  If you can qualify for the HomeStyle, it’ll likely save you some money and some interest costs. If not, the FHA 203(k) is a good choice, and you can always refinance to a cheaper conventional mortgage a few months (or years) after your renovations are complete.

One Caveat: When Should the Renovation be financed?

In every situation determine what renovations are adding the most value in your area, and then focus on those renovations. Generally, kitchens, baths, and adding square footage – that’s where you get the most bang for the buck. . . Your least bang for the buck are the things that have to be done, but they’re not sexy.  Often electrical, HVAC systems, etc. need updates.

When in doubt, talk to a local appraiser or realtor if your goal is to make your fixer-upper easier to sell at a higher price.

Now that you know how to finance renovation of a fixer-upper, it’s important to understand other options available other than those detailed above.  In the USA you have both the rights and opportunity to make “choices” that include non-traditional options like: hard-money private lenders, as well as investors who share profits when the fixer-upper is sold.

On the other hand, if planning to flip your fixer-upper and possibly make these opportunities your business, then consider what tax efficient strategies our clients are using.  Many of our clients form a C-Corporation to acquire and renovate properties while also sharing in both tax credits and special deductions and the investors in Small Business Stock have the best tax incentive under IR Code Section 1202, since 100% capital gain from their stock sale is tax-free!  Only in America! (See the first Article in this July, 2016 Newsline for more details).

If planning to settle into your fixer-upper for the long term, make the renovations you want to make, as long as they fit within 80% of your home’s future appraised value. So long as you keep yourself at that 80% threshold, or a little higher if you must, you’re likely making a good investment to remodel your personal residence.



Internet tax freedom! After years of temporary extensions, Congress has finally approved a permanent ban on taxing Internet services – (but taxes for online purchases still apply). The Trade Facilitation and Trade Enforcement Act makes the prohibition, which had started with the Internet Tax Freedom Act, permanent. Also, several states “grandfathered” under old rules must end taxes by June 30, 2020.

Be on red alert. The IRS has issued a new warning:  It has seen an approximate 400% surge in phishing and malware incidents this tax season: (IRS News Release IR-2016-28, 2/18/16) Emails sent by scammers look like official communication from the IRS or others in the tax industry. They might ask you to provide personal information or order tax transcripts. Stay vigilant.

Slowing down refunds. Some states are requesting that taxpayers provide their driver’s license number on tax returns as an extra security measure. This isn’t mandatory – at least not yet.

However, if you don’t provide the number, a refund could be delayed while the state uses other means to verify your identity. See more at New-Security- Safeguards.

Hack attack.  The breach of the IRS app, “Get Transcript” was even worse than initially thought. First, the IRS announced in May 2015 that 114,000 taxpayers were victimized by the data hack. Then it upped the figure by adding 220,000 taxpayers to the list in October. Latest word: As of Feb. 26, 2016, the IRS confesses that an additional 390,000 accounts were illegally accessed from January 2014 through May 2015.

Retirement changes on tap? President Obama has included the following tax related retirement plan proposals in his budget plan for 2017:

  • Authorize multi-employer 401(k) plans
  • Triple the retirement plan startup credit for small businesses to $1,500 per year
  • Require employers to permit certain part-time workers to participate in retirement plans
  • Require employers with more than 10 emp1oyees to offer an automatic IRA
  • Expand penalty-free withdrawals for unemployed individuals
  • Exempt taxpayers with $100,000 or less in retirement plans from required minimum distribution (RMD) rules
  • Prohibit additional tax-deferred retirement savings if you’ve already accumulated more than $3 million.
  • Allow all inherited retirement plan and IRA balances to be rolled over within 60 days

In an election year, most of these proposals are DOA (dead on arrival) in the Republican controlled Congress.

Put politics aside. A business can’t deduct contributions made in connection with a political candidate or party this election year. In a new private ruling, a corporation promised to match employee contributions to a political action committee (PAC).  But these payments would be linked to the PAC payments, creating an incentive for employees to contribute.  Therefore, they are nondeductible. (IRS Private Letter Ruling 201616002, 4/15/16).

IRS blows its whistle. The IRS has released the Whistle-blower Program report for Fiscal Year 2015 (FY2015). It shows an uptick in rewards as well as improvements that have been made to strengthen the program and fight fraud.  In FY2015, the IRS made 99 awards and issued 19 award payments to whistleblowers. The awards added up to $103,486,677 representing 20.6% of the total award amount collected since 2007.

IRS offers new convenience.  The IRS now allows taxpayers to pay their bills along with other items, such as beverages and snacks, at their local 7-11.  It recently approved the payment method for 7,000 Participating 7-1 1 convenience stores in 34 states across the nation. (IRS News Release IR -2016-56, 4/6/16) This provides an option for paying taxes in cash without having to go to a Taxpayer Assistance Center (TAC). But there are still several other steps involved, including visiting the IRS payment page at to submit your personal information.  You must pay a fee of $3.99 and the maximum payment is $1,000.  After you fork over the cash, you’ll receive a receipt and the payment will be posted within two business days.

Women’s tax liberation.  A new lawsuit filed in New York indicates growing opposition to sales taxes being levied on feminine hygiene products. Currently, the only states that exempt sanitary products from sales tax are Maryland, Massachusetts, Minnesota, New Jersey and Pennsylvania. But other states, including California, Connecticut, Illinois, Michigan, New York Ohio and Wisconsin, are considering legislative exemptions.

A tax misstep.  An exotic dancer who didn’t pay tax on $850,000 of income is headed to prison.  The dancer, who was convicted in 2014, claimed that the money she received, mostly from a single customer, represented gifts and loans. But the customer testified that he paid her $1,000 to $5,000 per session for dancing and sexual favors. Now the 8th Circuit Court of Appeals has confirmed the conviction. (Fairchild, No. 14-3517, CA-8, 3/17/16).

Restored tax credit. The thaw between the United States and Cuba isn’t limited to presidential visits and baseball games. Generally, a U.S. taxpayer can claim a foreign tax credit for taxes paid to another country, but not if the United States has severed diplomatic relations with that country. Cuba was such a country for decades, but now this restraint has been lifted.




The cost of compliance with the ever-growing Tax Code costs U.S. taxpayers a total of 8.9 billion hours and $409 billion, according to new research.

The IRS recently estimated that Americans will spend 8.9 billion hours complying with IRS tax-filing requirements in 2016, and according to a new analysis from the Tax Foundation, this translates to an annual tax compliance cost of $409 billion, or the equivalent of 4.3 million full-time jobs.

The calculations have increased substantially since 2012, when the IRS estimated the total paperwork burden at 6.1 billion hours.

“Time is the most valuable thing we have, and we should not be forced to waste it complying with IRS forms,” said Tax Foundation president Scott Hodge in a statement. Congress needs to keep this in mind as they move forward with tax reform over the next year. In addition to fostering economic growth, we need reforms that ease the burden of time on taxpayers. I think that’s something we can all get behind.”

The Tax Foundation’s analysis provides a breakdown of the most costly IRS forms and provisions for businesses and individuals. For example, the time spent complying with business income taxes costs $147 billion annually, while preparing individual income taxes costs another $99 billion.

There are also cases where the cost of compliance for a specific tax is nearly equal to the amount of revenue that tax brings in. The estate and gift tax, for example, will collect approximately $20 billion in federal revenues this year, but has a compliance cost of $19.6 billion.



Lawyers may take attorney-client privilege for granted, but if you have tax problems, you may be reminded how fundamental and important this privilege can be. Thanks to attorney-client privilege, if you tell your lawyer you are hiding money offshore, the IRS can’t make your lawyer reveal that information.

Of course, under the U.S. Constitution, you cannot be forced to testify against yourself. You can assert your Fifth Amendment rights and decline to answer IRS questions, even in front of a judge. But if you have documents – such as foreign bank account records –  the IRS can obtain them from you with a summons, subpoena or search warrant.

That may make you wonder if you aren’t better off with sensitive information in the hands of your lawyer. If you ask your lawyer to obtain your foreign bank records, your lawyer generally can’t be forced to hand them over to the IRS. In contrast, if you obtain your own foreign bank records, they are fair game.

Attorney-client privilege is designed to be strong so that clients (in both civil and criminal cases) will be forthcoming with their lawyers. Communications with accountants, however, are not protected by this privilege. If you make statements or provide documents to your accountant, he or she can be compelled to divulge them, no matter how incriminating they may be.

Of course, as accountants are quick to point out, there is a statutory “tax preparation” privilege. It was added to the Internal Revenue Code in 1998 (IRC Section 7525(a)(1)). Yet it is quite narrow in scope, and in any event, is entirely inapplicable to criminal tax cases. That makes it of little practical value.

In sensitive tax matters, one should confide in and obtain advice from a lawyer. Yet lawyers cannot do everything themselves. In fact, many tax lawyers do not prepare tax returns at all.

The answer to this quandary – used successfully for the last 50 years – is the Kovel letter, named after United States v. Kovel, 296 F.2d 918 (2d. Cir. 1961).  In a practiced procedure, your tax lawyer hires an accountant. In effect, the accountant is doing your tax accounting and tax return preparation, but is reporting as a sub-contractor to your tax lawyer.

That brings the work of the accountant under the auspices of the lawyer’s privilege. There may be work product protection too, of course, but that is a separate and generally weaker privilege in any event. Properly executed, a Kovel letter imports attorney-client privilege to the accountant’s work and communications.

The importance of this rule to the handling of even many pedestrian civil tax matters cannot be overstated. And when it comes to potential inquiries from the Criminal Investigation Division of the IRS, the Kovel letter is essential. However, recent IRS lawsuits are eroding some of traditional Kovel protections.

These IRS inroads into attorney-client privilege should motivate tax lawyers, accountants and the clients who hire them to be increasingly careful. Sometimes slips in communication protocols or in dual roles where the accountant is also working directly with the ultimate client can vitiate protection. For example, in United States v. Richey, 632 F.3d 559 (9th Cir. 2011), the Ninth Circuit refused to protect an appraisal that a taxpayer, lawyer and accountant sought to keep from the IRS.

In some cases the assaults are even more frontal. In United States v. Hatfield, 210 WL 183522 (E.D.N.Y. 2010), the court forced disclosure of discussions between the lawyer and accountant. These and other developments make clear lines of communication more imperative than in the past. The scope of the engagement is important, too.

A Kovel arrangement is premised on the notion that the accountant’s communications were “made in confidence for the purpose of obtaining legal advice from the lawyer.” See United States v. Adlman, 68 F.3d 1495 (2d Cir.1995). The attorney is the client in a Kovel engagement. That means the accountant should address all correspondence to the lawyer.

It also means that information acquired by an accountant under a Kovel agreement should be distinguished from information collected by the accountant as an auditor or in some other capacity. The Kovel agreement is so commonplace that lawyers, clients and accountants sometimes take them for granted. Some may even blithely assume that attorney-client protection will always apply.

You must, however, keep things as separate and well-documented as you can. Pre-existing relationships between the accountant and the ultimate client are especially prickly. A Kovel agreement should protect communications prospectively but clearly cannot protect the past.

There is no right answer to this situation, nor is there a single right way to handle it. However, it is better to consider the advantages and disadvantages of hiring a particular accountant or accounting firm than to ignore the issue.

Fortunately, attorney-client privilege is rarely tested in this context. That is true even in criminal tax cases. However, you don’t want to end up having to fight about disclosure before a judge, especially where the communications may be very revealing. Having a lawyer hire the accountant to try to import privilege is cautious and the practice remains widespread. But additional precautions, such as more rigid direction from the lawyer to the accountant and segregation of accounting and legal files, are good ideas.



Providing a wide range of Specialized non-traditional Solutions plus offering traditional CPA services including:

  • Real Estate Transactions
  • Entity Structuring
  • Asset Protection Solutions
  • Business & Tax Advisory
  • Strategic Tax Planning
  • Comprehensive Accounting Solutions including data and payroll processing.
  • Representation for Resolution of Tax Problems involving levy, liens, audit defense, payment plans, un-filed tax returns, penalty abatement and offers in compromise.
  • Tax Return Preparation for Business and Real Estate owners, Professionals, Investors, Individuals, Corporations, Partnerships, Estates, Trusts and Exempt organizations.

Our experienced team of dedicated Professionals are committed to providing personal attention, quality work, reliable proactive, helpful services and solutions to make complex accounting and compliance tasks easier, gain greater financial control and increase profitability by providing timely, accurate and comprehensive accounting, data and payroll processing services.  This allows you more time to focus on growing your enterprise.

Professional Tax Advisors consult on all aspects of tax compliance, advisory and planning, including individual, corporate, partnership, fiduciary, trust, gift and tax exempt organization tax returns.  These tax related services are provided by Zerjav & Associates, Certified Public Accountants, which has an alternative practice structure that is a separate and independent entity which works together with the Advisory Group Associates to serve clients’ needs.

Our Core values include: Accountability, Accuracy, Collaboration, Commitment, Efficiency, Integrity, Passion, Quality, Respect and Service Excellence offered by our team of Professional Tax Advisors and Tax Resolution Experts.

Our primary objective is the well-being of clients, their family and their survivors, as well as their satisfaction with the work we do, while our goal is to be the best, not the biggest firm.

How may we better service you?

Your opinion matters!

For More Information, Contact by phone or email

(314) 205-9595 or toll free (888) 809-9595

Our professional service offerings are tailored to each stage of a client’s tax life, from basic compliance and tax return preparation, where our process is imperative to minimizing costs, to many complex circumstances, where both our process and specialized knowledge is the key to successful results.

Our complimentary monthly electronic newsletter to subscribers provides comprehensive and timely insight on a wide range of taxation issues including federal and state tax incentives and current issues.

We also offer an initial complimentary consultation to help us identify proven tax-smart strategies, options and solutions that deliver  real value for the professional services needed based upon the particular situation of any taxpayer.

Our Mission:   Sharing Solutions that deliver a real value.

Tax Professional Standards Statement. The TAX TIPS NEWSLINE is published monthly to provide general educational tax compliance tips, information, updates and general business or economic data compiled from various sources.  This document supports the marketing of professional services and does not provide substantive determination or advice affecting specific tax liability.  It is not written tax advice directed at the particular facts and circumstances of any taxpayer.  Nothing herein shall be construed as imposing a limitation from disclosing the tax treatment or tax structure of any matter addressed.  To the extent this document may be considered written tax advice, in accordance with applicable requirements imposed under IRS Circular 230, any written advice contained in, forwarded with, or attached to this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

If you are not the original addressee of this communication you must delete this message from your computer system.  Any disclosure, copying, distribution of this communication or the taking of any action based on it is strictly prohibited.

You have received this communication because you may have agreed to receive correspondence from this office.  If you no longer wish to receive this newsletter, or you need to update your email address you must respond to this e-mail and place “UPDATE INFORMATION” in the subject line.


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