Accounting Working Papers

INTRODUCTION

In a split decision very controversial, the U.S. Court of Appeals for the First Circuit held that work product privilege does not protect a corporation's tax year of working papers of the discovery IRS. United States v. Textron Inc., ____ F.3d ____, 2009 WL 2476475, No. 07-2631 (1st Cir. August 13, 2009), the First Circuit held that the tax year of working papers are not protected product work because they were ready to support the financial deposits and gain approval of the auditor, rather than for use in possible litigation. U.S. lawyers denounce the internal review, arguing that it robs them of their ability to work with auditors to ensure accurate financial and accounting disclosures and well informed. The decision creates a split between circuits, which makes the issue ripe for Supreme Court review.

BACKGROUND

The IRS defines the tax records of job performance as "audit working papers, whether prepared by the taxpayer's accountant or independent auditor, which refer to the tax reserve for courses deferred tax liabilities and potential or possible, however classified or reported on during the audited financial statements and notes to disclose tax reserves on audited financial statements. Internal Revenue Manual Section 4.10.20.2 (2).

A tax of the company and legal staff in general create tax papers of exercise to calculate the appropriate amount of total tax reserves. Textron tax documents work exercise included a spreadsheet listing each item doubtful that could be subject to possible challenge by the IRS, the dollar amount subject to dispute, and the chance of success estimated by the IRS point. The papers also included many backup materials, including documents written by lawyers at the Internal Textron reflecting their views on elements that should go to the spreadsheet and the risk of litigation percentage should apply to each section.

During the review of the IRS Textron, IRS agents found that a subsidiary of Textron has invested in transactions that the IRS determined tax shelters, and subsequently issued an administrative order to all relevant documents the firm's tax work exercise. Textron refused to comply, arguing that the records of the tax year of work have been protected by the work product privilege.

The IRS commenced an action in Rhode Island federal district court to force Textron to produce working documents of the tax year. The district court determined that the papers were protected by work product privilege because they would not do Textron prepared "but for" the fact that Textron anticipated the possibility of a dispute with the IRS. U.S. States v. Textron Inc., 507 F. Supp. 2d 138, 150 (DRI 2007).

A panel of U.S. Court of Appeals for the First Circuit agreed with the district court in full, but the IRS 'application of the First Circuit's opinion left panel and a rehearing en banc the case . After the hearing, the First Circuit issued a 3-2 decision reversing the district court and conclude that the work product privilege does not protect tax papers from Textron year. U.S. v. Textron Inc., ____ F.3d ____, 2009 WL 2476475, No. 07-2631 (1st Cir. August 13, 2009).  

papers are not protected if they are not prepared for use in litigation

The majority in the First Circuit en banc decision did not investigate whether the tax year of working papers were prepared for the "reason" the prospect of future litigation, as the District Court and First tour group had done. Instead, the panel majority has considered the purpose of effective use papers, noting that although the documents may have included legal thought and analysis, Textron did not prepare the papers' employment .