Alice B. (“Babette”) Toklas has a new pastry catering business which she operates from her home. The only delicious delectable pastry, and best seller, that Babette sells is her special, knock you over brownies with their “secret ingredient.” Babette’s husband Douglas is a writer. While Douglas and Babette rely upon the income from Toklas Tasties to cover household expenses between Douglas’s successful writings, Douglas is not much of a cook and lets Babette run the catering business. Douglas’s latest novel made it to the New York Times best seller list. Because of the swings in the Toklas income, Owen Moore, their accountant, assists them in filing their joint income tax return each year. Ignoring Owen’s advice, Babette and Douglas do not report income from the catering business to the Internal Revenue Service. The Toklas just received notice of an audit of their last year’s joint return. If asked by a revenue agent, must Owen disclose the income from Toklas Tasties, or is there an accountant-client privilege? If Babette is ever prosecuted for Toklas Tasties, can she prevent Douglas from disclosing what she told him, including that the “secret ingredient” in her delicious delectable brownies is marijuana?

Accountant-client privilege. Generally, under Texas law a communication made by a client to an accountant or employee of the accountant in connection with services provided to the client is confidential and not discoverable. But, under federal law, no accountant-client privilege is recognized. Therefore, Owen would be forced to disclose his files and knowledge of the source of the income received by Toklas Tasties to agents from the United States Internal Revenue Service.

Husband-wife-communication privilege. The purpose of the husband-wife-communication privilege is to preserve the integrity of the marital relationship. Generally, private communications that are only between spouses and are not intended for disclosure are privileged and are not subject to discovery. If prosecuted for Toklas Tasties, it is likely that Babette can prevent Douglas from disclosing what she told him about her “secret ingredient.”

Tilting the Scales in Your Favor:
Even if the source of the income is arguably a criminal matter, the United States Internal Revenue Service is primarily tasked with, among other things, identifying and collecting taxes upon unreported income. Babette and Douglas would have been better off taking Owen’s advice and reporting the income from Toklas Tasties on their tax return.