Judge rules against IRS

March 2005

The IRS suffered a legal setback in its effort in attempting to prove that the accounting firm of BDO Seidman sold and marketed questionable tax shelters in recent years.

In a ruling made last week, Judge James F. Holderman, of the Federal District Court for the Northern District of Illinois, said that BDO Seidman did not have to turn over to the IRS over 200 documents that detailed work for specific clients on questionable tax shelters. Judge Holderman wrote that the IRS had failed to prove that the accounting firm had engaged in widespread illegal practices in its work on the type of tax shelter in question.

Judge Holderman sided with BDO Seidman, which argued that the documents were protected by confidentiality governing the secrecy of communications between a firm and its clients, including attorney-client privilege, work product privilege and tax practitioner privilege. A law enacted 1998 on privilege gives accountants the same protection as lawyers. The confidentiality privileges, however, are waived in situations in which a crime or fraud is involved.

Judge Holderman made an exception in his ruling for one document, an e-mail message that he said could fall under the rule excepting crime or fraud situations.

The tax shelter in the case is called a Cobra, which stands for Currency Options Bring Reward Alternatives. The IRS never considered the Cobra shelter valid for deductions, and formally banned it in 2000.

Over twenty individuals who had invested in the shelter had filed a petition seeking to prevent BDO Seidman from turning over the documents. The identities of these individuals are already known to the IRS.

In its war on questionable tax shelters, the IRS has been attempting to obtain the documents in order to prove that BDO Seidman worked with accounting, financial and law firms in order to engage in the widespread sales and marketing of abusive and questionable shelters.

the Judge's ruling mirrors a similar one he made last July that upheld confidentiality protection for more than 100 BDO Seidman documents the IRS was seeking.

However, Judge Holderman's ruling contrasts with recent rulings by other judges, including Judge Shira A. Scheindlin of Federal District Court in New York, on similar cases involving BDO Seidman and other firms