For non-compliant taxpayers, a tax practitioner’s ethical duties are well summarized by the IRS see: IRS Offshore Voluntary Disclosure Program; Frequently Asked Questions and Answers 2014 (Effective for OVDP submissions made on or after 7/1/14, updated 2/8/16), see FAQ #47. The advice due client is contained in Circular 230 (Treas. Dept.) Sec. 10.21 re: non-compliant taxpayers and penalty issues for non-compliance.
A practitioner has an ethical duty under Sec. 10.21 to advise the taxpayer of their tax non-compliance and their penalties (both civil and criminal) for tax non-compliance. For CPAs if the taxpayer does not remedy their non-compliance the CPA is not authorized to prepare & file their tax returns forward.
There is no attorney-client privilege for criminal tax evasion so if a client is not accepted into the IRS OVDP they are then subject to both IRS civil tax examination and criminal tax prosecution (see FAQ 51 & 51.3).
Under IRS Streamlined Filing Compliance Procedures (both domestic and foreign) it only is for non-willful taxpayers with no pre-emption for criminal prosecution. Once the returns are filed under the streamlined procedure they may be selected for audit, subject to additional civil penalties and if willful criminal prosecution.
A CPA with a client (in this tax position) may not object to testifying as a witness against the client based on an attorney- client privilege but would instead have to rely on another basis (e.g. 5th amendment right against self-incrimination, or unreasonable search under the 4th amendment.)
As a final matter, for those tax practitioners who are aware that clients are non-compliant they may face two separate criminal issues (unless they advise clients of their non-compliance under Circular 230 Sec. 10.21 and withdraw if the clients refuse to become compliant prior to their acts being irreparably willful):
1) 18 USC 371: Conspiracy to Evade Taxes (a “Klein conspiracy”) a five-year felony
2) 18 USC 4: Misprision of a Felony. It is a felony to be aware of a felony (including a tax felony) and fail to report it to a court or other competent authority.
Criminal Tax Issues
1) Duty as a tax practitioner Treas. Dept. Circular 230 (Sec. 10.21): knowledge of client’s non-compliance with US revenue laws, or omissions/errors on tax returns requires you advise client promptly of fact of client’s non- compliance or error and consequences;
2) Failures to file Form 3520 subject client to 35% penalty re: distributions received;
3) Failure to file Form 3520-A re: foreign trust distributions (which is a grantor trust due to a US beneficiary receiving trust distributions subjects client to criminal penalties under IRC sections 7203, 7206, 7207 for either failing to file or filing false tax returns (i.e. Form 1040);
4) Failure to include foreign trust income received on their personal tax return is an unreported income issue, please review IRC Sec. 7201 (Tax Evasion i.e. Willful Evasion of Tax is a 5 year felony); IRC 7212 Obstruction of Tax Collection is a 3 year felony);
5) If tax evasion proceeds were used as the source of funds to buy any assets (e.g.. real estate) the client may be subject to criminal prosecution for 3 separate felonies: Money Laundering (18 USC Sec. 1956 & 1957), Mail Fraud (18 USC 1341), Wire Fraud (18 USC 1341);
6) Under IRC Sec. 7525(a)(1)(2) there is no attorney-client privilege for common law protections of confidentiality in a criminal tax matter i.e. you could be forced to testify against your client;
7) Client tax returns filed were apparently erroneously prepared by a CPA (not working under an attorney privilege i.e. Kovel). The tax returns do not appear to be privileged at all (i.e. no Kovel privilege). In addition, it is the IRS position that the Kovel privilege does not apply to a filed tax return since there is no expectation of private communications in a public tax filing i.e. a tax return.