Limits on client confidentiality

Like priests and physicians, lawyers and accountants are covered by the rules on privileged communication or confidentiality on matters disclosed to them by their clients in the course of their professional work.

This means, they cannot be compelled to reveal information given to them in confidence unless their clients give their prior consent or are required by law to do so.

The policy on confidentiality is aimed at encouraging clients to be forthright and truthful with their lawyers or accountants, content with the thought that their confidence will not be betrayed.

From the point of view of the Bureau of Internal Revenue (BIR), this rule does not constitute a legal impediment in the performance of their duty to enforce compliance by taxpayers with their tax obligations.

Recently, it issued Revenue Memorandum Circular 12-2018, dated Feb. 22, 2018, clarifying the power of the BIR commissioner to obtain information about taxpayers through their lawyers or accountants.

In ascertaining the correctness of any return, or making a return when none has been made, or determining the tax liability of any taxpayer, the circular states that the BIR commissioner can secure any information needed for that purpose “from any person other than the person whose internal revenue tax liability is subject to audit or investigation.”

The circular addresses the issue on the application of the lawyer-client and accountant-client confidentiality rule on BIR investigations that involve the production of the records or documents of taxpayers under investigation that are in the possession of their lawyers or accountants.

The circular cites the following reasons the BIR commissioner’s investigative authority under the Tax Code is an exception to that rule:

Rule 21.01 of the Lawyer’s Code of Professional Responsibility provides that a lawyer shall not reveal the confidence or secrets of his client except, …, when required by law

The Supreme Court has ruled that the privilege does not extend to those made in contemplation of a crime or perpetration of fraud, in particular, attempts to evade or defeat tax obligations

For accountants, Republic Act 9298 states that the privilege does not apply if the production of documents is through a subpoena issued by any court, tribunal, or government regulatory or administrative authority

The accountants’ Code of Ethics enjoin them from disclosing to outsiders confidential information acquired as a result of professional and business relationships unless there is a legal right or duty to disclose

Taxes are the lifeblood of our nation so its collection should be actively pursued without unnecessary impediment.

There is no question about the good intention of the circular to raise more revenues for the government by running after taxpayers who do not pay the right amount of taxes.

Neither is there any dispute that some lawyers or accountants use their familiarity with tax and accounting regulations to evade the payment of taxes by their clients through questionable schemes.

And when the paper trail leads to their offices and are ordered to turnover their clients’ records, they are quick to invoke lawyer-accountant-client privilege to stymie or delay efforts of the BIR in building a case against their clients for violation of the tax laws.

The enforcement of this circular though is not expected to be smooth. Because of its adverse effects on lawyer-client and accountant-client relationship, it should not come as a surprise that some lawyers or accountants would question in court its legality or its interpretation of the confidentiality rule in the enforcement of tax regulations.

There is a thin line that separates “tax avoidance” (or availment of tax benefits that allow reduced or nonpayment of taxes) which is perfectly legal, from “tax evasion” (or refusal to pay taxes that are due and owing) which is illegal. This would be the crux of any challenge to the circular.

The ability of the BIR to effectively enforce its investigative authority would depend on how well it treads this line.