Law Firm Client Lists and Attorney-Client Privilege

When the government conducts tax investigations into a series of common transactions entered into by numerous taxpayers, it often issues document demands to third parties who may have facilitated such transactions, such as banks, brokerage firms, cryptocurrency exchanges, barter exchanges, and, on occasion, law firms.  Such demands can come in the form of a “John Doe Summons” (a special type of IRS administrative summons) or a grand jury subpoena.  One item typically sought by the government is the list of customers or clients who participated in the transactions under examination.  The government has successfully litigated its ability to obtain a list of law firm clients, even when doing so appears on the surface to conflict with the attorney-client privilege.

Disclosure of a client’s name to the government does not eliminate the protection of privilege for attorney-client communications.  The attorney-client privilege is robust, and it will still generally protect clients from the disclosure of their confidential communications in connection with the legal advice they received.  Law firms are ethically obligated to notify their clients if the government has issued a demand for documents that may cover client information of any type.  The law firm will ask the client whether the client wishes the law firm to assert the attorney-client privilege on behalf of the client on a document-by-document basis.  Thus, taxpayers who learn that one of their service providers, even their law firm, has received a “John Doe” summons or a grand jury subpoena should quickly seek independent counsel as to how to proceed.

Summary of the Law

One of the most fundamental aspects of the attorney-client relationship is the protection of all legal communications as privileged.  The purpose of that protection is to encourage open and frank communications between lawyer and client so that the client can obtain the best advice possible without fear that client confidences will be revealed.  There are limitations, but in general the government cannot compel the disclosure of privileged communications between a client and their attorney.

Only the client may waive attorney-client privilege or authorize disclosure of confidential communications.  Whether or not the client intends to waive privilege, such a waiver can occur if the client discloses legal communications to a third party, including sharing such information with a non-lawyer expert (such as an accountant or other advisor) without putting in place certain necessary legal protections.

Moreover, the privilege is not absolute, as certain communications are not privileged.  For example, communications lose protection if a client uses the services of a lawyer while intending and planning to execute a crime or fraud.  This is known as the “crime-fraud” exception to the privilege.

Additionally, the “business” aspect of a legal representation is not privileged.  “Business” refers to the administrative aspect of the attorney-client relationship, such as engagement, billing, and other logistical aspects.  Normally, an attorney is prohibited from revealing information relating to the representation of a client unless the client gives informed consent, and the attorney must otherwise strictly protect client information from disclosure.  However, the identity of the client and the fact of the client’s engagement of the law firm is almost always an exception to this prohibition, which means that the law firm often has no choice but to turn over its client list.

Thus, the government can compel disclosure of certain aspects of the attorney-client relationship, even ones otherwise kept confidential, so long as such disclosures do not reveal privileged communications.  Such disclosable matters include:

• The existence of an attorney-client relationship, including the identity of the client;
• Any fee arrangement or engagement letter;
• Timesheets and bills (except for any description of legal advice); or
• Any communication for non-legal purposes (administrative or business advice).

Conclusion

Subject to the exceptions described above, the attorney-client privilege protects confidential communications between attorney and client.  Taxpayers at risk of having their identity as a client disclosed in response to a government demand such as a John Doe summons should take all reasonable steps to protect the privileged advice they received.  The fact that the IRS is investigating a type of transaction in which the taxpayer participated is also a good reason for the taxpayer to engage independent counsel to reassess any positions taken on prior tax returns in reliance on advice of counsel.  There may be actions that the taxpayer can take to limit their exposure to civil or criminal penalties arising out of having taken such positions.  

The attorneys at Caplin & Drysdale stand ready to answer any questions about this Alert, or any substantive tax issues raised by “John Doe” summonses or similar subpoenas.