Outsourcing Tax Staff: Don’t Outsource Attorney-Client Privilege

Tax Notes State

Many companies are outsourcing tax functions to third-party tax service providers. These types of outsourcing arrangements inevitably lead to vital institutional knowledge regarding a company’s tax functions being held by individuals who are not employed by the company but are instead employed by third parties. When a company consults with its outside legal counsel for advice on tax matters, it is nearly impossible to avoid including these outsourced individuals in the discussions because they may be the only people who possess the knowledge that legal counsel will need in order to provide competent legal advice. However, by including these non-employee individuals in discussions with legal counsel, a company may inadvertently waive its attorney-client privilege. We are seeing privilege issues arise with increasing frequency as more companies outsource part or all of their tax functions to third parties.

The attorney-client privilege is a client’s right to decline to disclose, and to prevent any other person from disclosing, confidential communications between the client and its attorney made for purposes of obtaining legal advice. The purpose of the privilege is “to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice.” The attorney-client privilege may apply to protect communications between a company and its attorney when a company receives requests for documents in litigation, administrative proceedings, acquisitions, financial audits, and tax audits.

However, as the attorney-client privilege is intended to protect confidential communications between the client and its attorney, the privilege may be waived if the company fails to maintain the confidentiality of the communication. Waiver can occur whether or not the company intends to waive its privilege (that is, an inadvertent disclosure of the communication to a third party). Further, in the corporate context, the scope of the attorney-client privilege can be more complicated because, as the client is not a natural person, it can be more difficult to determine which individuals who work for the company also qualify as “the client” for purposes of the privilege.

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“Outsourcing Tax Staff: Don’t Outsource Attorney-Client Privilege,” by Mitchell A. Newmark and Eugene J. Gibilaro was published in the May 2021 edition of Tax Notes® State (Vol. 100). Reprinted with permission.