Tax secrecy, tax advisor-client privilege, banking secrecy and other legally protected confidentiality rights in tax proceedings

Tax secrecy (Steuergeheimnis, secret fiscal), tax advisor-client privilege (Steuerberatergeheimnis, secret professionnel du conseiller fiscal), and banking secrecy constitute a complex normative framework protecting the confidentiality of taxpayer information and communications between taxpayers and their professional advisors from disclosure to third parties, including tax authorities, courts, and other governmental entities. These institutions represent fundamental pillars of trust in tax systems, balancing the sovereign needs of the state for effective tax law enforcement and combating fiscal fraud against constitutional rights of individuals to privacy, protection of professional communications, and access to independent legal counsel without fear that disclosed information will be used against the taxpayer.

THE FUNDAMENTAL TENSION IN MODERN TAX ADMINISTRATION

This doctrinal architecture embodies an inherent tension between competing values in contemporary tax systems: on one hand, the imperative of effective tax law enforcement, combating tax avoidance and fiscal fraud, and ensuring equal treatment of all taxpayers; on the other, the protection of fundamental individual rights to privacy, confidentiality of professional communications, and access to independent legal advice without apprehension regarding the potential adverse use of disclosed information. The post-2008 financial crisis era has witnessed unprecedented pressure toward fiscal transparency, culminating in dramatic curtailment of banking secrecy and the introduction of global automatic exchange of information regimes (CRS, FATCA). Nevertheless, implementation of these mechanisms encounters mounting resistance grounded in concerns regarding privacy protection, unauthorized data exploitation, and risks of fundamental human rights violations.

LEGAL NATURE AND SUBSTANTIVE SCOPE

Tax Secrecy: Governmental Obligation to Maintain Taxpayer Confidentiality

Tax secrecy (tax secrecy, taxpayer confidentiality) constitutes a legal obligation incumbent upon tax administration organs and their employees to maintain in confidence all information concerning a taxpayer’s fiscal situation obtained during administrative proceedings, tax audits, verification activities, and automatic international information exchange. This confidentiality encompasses tax returns and attached documentation, information regarding income, losses, assets, and taxpayer liabilities, correspondence with tax authorities, documentation of tax proceedings and audits, information received from foreign tax authorities pursuant to information exchange treaties, and data obtained through the Common Reporting Standard and Foreign Account Tax Compliance Act.

The objectives of tax secrecy are multifaceted, protecting both public and private interests. First, it safeguards taxpayer privacy and commercially sensitive information from unauthorized disclosure to competitors, media, or the general public. Second, it encourages voluntary tax compliance by assuring taxpayers that candid and complete disclosure of financial circumstances will not be exploited against them for non-tax purposes. Third, it protects the integrity of the tax system by fostering trust between taxpayers and the administration. Fourth, it prevents utilization of tax information for non-meritorious, political, or discriminatory purposes.

The statutory architecture of tax secrecy varies significantly across jurisdictions, reflecting different constitutional traditions and policy choices regarding the balance between governmental efficiency and individual privacy. The United States’ comprehensive approach, embodied in Internal Revenue Code Section 6103, establishes one of the world’s most stringent statutory frameworks for taxpayer confidentiality. Enacted as part of the Tax Reform Act of 1976 in direct response to abuses during the Nixon administration’s Watergate scandal – when it was revealed that the President and his associates weaponized the Internal Revenue Service for political persecution through targeted audits and threats of tax information disclosure – Section 6103 provides that tax returns and return information are confidential and may not be disclosed by the IRS or its employees except as expressly authorized by statute.

Violations of Section 6103 constitute federal felonies punishable by up to five years’ imprisonment, fines up to $5,000, and liability for prosecution costs. The provision contains an exhaustively detailed catalogue of exceptions permitting disclosure under strictly circumscribed circumstances, including with taxpayer consent, to persons with material interest, to state agencies responsible for state tax administration, to law enforcement pursuant to court order, and to the Social Security Administration for social insurance administration purposes. This statutory framework represents a deliberate congressional determination that the public interest in tax system integrity and taxpayer privacy outweighs competing interests in transparency, except where carefully calibrated exceptions serve compelling governmental interests.

Tax Advisor-Client Privilege: Professional Confidentiality Protection

Tax advisor-client privilege (tax advisor-client privilege) protects communications between taxpayers and their professional tax advisors from compelled disclosure in administrative, judicial, and criminal proceedings. This privilege rests upon two fundamental pillars developed in distinct legal traditions.

Attorney-client privilege constitutes the oldest and most extensively developed form of protection, safeguarding communications between clients and attorneys providing legal services, including tax advice. This privilege evolved within the Anglo-American common law tradition and is recognized as foundational to the proper functioning of the justice system. The privilege rests upon the principle that effective legal representation requires clients to communicate candidly with counsel without fear that their confidences will be used against them, and that this confidentiality serves not merely private interests but the public interest in the administration of justice.

Tax practitioner-client privilege represents a newer, expanded form of protection for communications between taxpayers and other tax advisors who are not attorneys (certified public accountants, enrolled agents, tax advisors), introduced in certain jurisdictions in response to arguments that unequal treatment of different categories of tax advisors is inequitable and impedes taxpayers’ access to professional assistance. The most significant development in this domain occurred in the United States with the enactment of Internal Revenue Code Section 7525 as part of the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA).

The Limited Scope of IRC Section 7525: A Compromise Solution

Section 7525 extended attorney-client privilege to communications between taxpayers and “federally authorized tax practitioners” (FATPs) – persons authorized to practice before the IRS pursuant to regulations contained in 31 U.S.C. § 330, encompassing certified public accountants (CPAs), enrolled agents, enrolled actuaries, and other licensed tax professionals. This legislative intervention represented a congressional determination that the historical limitation of privilege to attorney-client communications created an inequitable disparity in access to confidentiality protections, particularly problematic in tax matters where a substantial proportion of professional advice is rendered by non-lawyers possessing deep technical expertise in accounting and tax law.

Nevertheless, IRC Section 7525 contains several significant limitations that substantially diminish its practical utility compared to traditional attorney-client privilege. First, the privilege applies exclusively to civil tax proceedings before the IRS or in federal civil courts – it does not encompass criminal proceedings concerning tax offenses, meaning such communications may be compelled in criminal tax investigations. Second, the privilege does not protect documents and communications related to tax return preparation, but only tax advice extending beyond routine compliance. Third, the privilege is excluded for communications concerning promotion of aggressive tax avoidance structures (tax shelters), rendering it useless in the most controversial tax planning matters. Fourth, the privilege applies solely to federal taxes – it does not cover state and local taxes, where divergent standards determined by state law apply.

HISTORICAL GENESIS AND INSTITUTIONAL EVOLUTION

Medieval and Early Modern Periods: Absence of Fiscal Privacy

In antiquity and the medieval period, the concept of tax privacy was virtually unknown to fiscal systems. Taxes were frequently collected publicly, and information regarding citizens’ wealth and tax obligations was accessible to local authorities and communities within feudal social structures. In medieval England, tax registers were partially public to enable local communities to monitor collection fairness and prevent arbitrariness by royal officials. Similarly, in medieval France and Italian states, tax books were often accessible to merchants and craftsmen organized in guilds for verification of equal treatment.

The concept of professional privilege for lawyers (attorney-client privilege) developed in England during the sixteenth and seventeenth centuries as a consequence of legal profession development and practice professionalization. Initially, this privilege was justified by considerations of honor and trust – the relationship between client and attorney was conceived as analogous to the confessional relationship between penitent and clergy, where candor and trust are essential for proper function. Nevertheless, for an extended period, attorney-client privilege did not encompass tax matters, which were treated as administrative and fiscal questions belonging to the executive power domain, rather than as legal matters requiring procedural protection.

The Swiss Banking Secrecy Revolution: Unintended Consequences

A pivotal moment in financial privacy history was the enactment of the Swiss Banking Act of 1934 (Bundesgesetz über die Banken und Sparkassen), which introduced criminal penalties for disclosure of client information by Swiss banks or their employees. Article 47 of the statute provided that any person intentionally disclosing secrets entrusted to them as a member of a governing body, employee, agent, or liquidator of a bank is subject to imprisonment for up to six months or a fine up to 50,000 francs.

Swiss banking secrecy was introduced in the context of the Great Depression and mounting threats from totalitarian fascist regimes in Europe, ostensibly to protect Jewish capital and that of other persecuted groups from confiscation. Nevertheless, this institution rapidly became a mechanism exploited by wealthy individuals worldwide to conceal assets from their home countries’ tax authorities, transforming Switzerland into a global center for “flight capital” and pioneering the contemporary offshore tax haven industry. This unintended metamorphosis from a protective measure for political refugees to a facilitator of systematic tax evasion exemplifies the law of unintended consequences in financial regulation.

American Experience: From Public Disclosure to Absolute Confidentiality

In the United States, throughout much of the nineteenth century and the first half of the twentieth century, tax returns were periodically public or partially accessible. During the Civil War, World War I, and the Great Depression, Congress repeatedly enacted provisions requiring public disclosure of the wealthiest Americans’ tax information, and newspapers published lists of prominent citizens’ incomes as a means of promoting voluntary tax compliance through social pressure and transparency. This approach reflected a distinctly American tradition of republican governance, wherein transparency was conceived as essential to democratic accountability and prevention of elite tax evasion.

The situation underwent fundamental transformation in 1976, in response to Nixon administration abuses during the Watergate scandal, when it was revealed that the President and his collaborators weaponized the Internal Revenue Service for political persecution of adversaries through targeted tax audits and threats of tax information disclosure. This constitutional crisis precipitated a dramatic congressional response: the Tax Reform Act of 1976 introduced Internal Revenue Code Section 6103, establishing a comprehensive taxpayer information confidentiality protection system in the United States, as previously discussed.

THE TRANSPARENCY REVOLUTION: DISMANTLING BANKING SECRECY

Post-Crisis International Mobilization

Following the 2007-2008 global financial crisis and a series of scandals involving the use of Swiss and other foreign banks for tax evasion (the UBS matter in 2008-2009, which led to disclosure of thousands of American clients concealing assets in Switzerland; the HSBC Private Bank matter in 2010; the LGT Bank matter in Liechtenstein in 2008), the international community undertook decisive action against banking secrecy and tax havens.

The OECD published in April 2000 the report Improving Access to Bank Information for Tax Purposes, which called upon member countries to eliminate obstacles to tax authorities’ access to banking information for fiscal purposes. This report challenged prevailing arguments regarding the necessity of absolute protection for bank client privacy and proposed a standard whereby banking secrecy could be lifted in cases of justified suspicion of tax fraud or tax avoidance.

The watershed moment arrived with the G20 Declaration announced at the London Summit in April 2009, where leaders of the world’s largest economies unanimously proclaimed: “The era of bank secrecy is over”. This historic declaration constituted a direct response to the financial crisis and mounting conviction that banking secrecy served primarily to facilitate tax fraud, money laundering, and terrorism financing. In the wake of this declaration, Switzerland, Luxembourg, Austria, Belgium, and Liechtenstein – traditional bastions of banking secrecy – withdrew their reservations to Article 26 of the OECD Model Tax Convention, which governs tax information exchange between states.

FATCA: American Extraterritorial Tax Enforcement

The United States in 2010 enacted the Foreign Account Tax Compliance Act (FATCA), the most aggressive unilateral instrument in international tax law history. FATCA requires foreign financial institutions (FFIs) to identify and report to the IRS information regarding accounts belonging to U.S. taxpayers (citizens and U.S. tax residents) under threat of imposition of a 30% withholding tax on all payments from U.S. sources. This draconian sanctions mechanism compelled virtually all significant financial institutions worldwide to implement identification and reporting procedures, rendering FATCA a de facto global standard, notwithstanding its unilateral imposition as an American regulation.

FATCA’s architecture exemplifies a novel paradigm in international tax enforcement: rather than relying upon traditional bilateral treaty mechanisms or multilateral cooperation frameworks, the United States leveraged its position as the world’s largest capital market to impose extraterritorial compliance obligations. Foreign financial institutions faced a Hobson’s choice: either implement costly FATCA compliance infrastructure or face effective exclusion from U.S. capital markets through prohibitive withholding taxes. The overwhelming majority chose compliance, thereby acquiescing to American jurisdictional assertions that would have been unthinkable in any other regulatory domain.

CRS: Multilateral Automatic Exchange

The OECD, inspired by FATCA’s success in compelling international cooperation, developed the Common Reporting Standard (CRS) endorsed by the G20 in 2014 as a global standard for automatic exchange of tax information (Automatic Exchange of Information, AEOI). CRS requires financial institutions to identify tax residents of other jurisdictions and automatically, annually report detailed information regarding their accounts (balances, income, capital gains, dividends, interest) to the tax authorities of the taxpayer’s country of residence.

By 2025, over 110 jurisdictions had implemented CRS, creating the largest automatic tax information exchange network in history, annually transmitting hundreds of millions of account reports concerning aggregate asset values exceeding $11 trillion. This represents an unprecedented transformation in the landscape of international tax administration, effectively rendering financial secrecy obsolete for compliant financial institutions in participating jurisdictions.

DAC6: THE COLLISION BETWEEN FISCAL TRANSPARENCY AND PROFESSIONAL PRIVILEGE

The Mandatory Disclosure Regime and Its Discontents

The introduction of Council Directive (EU) 2018/822, commonly known as DAC6 (the sixth directive on administrative cooperation in taxation), in May 2018 precipitated the most intensive legal conflict between fiscal transparency requirements and professional privilege protection in contemporary tax law history. DAC6 imposed upon European Union member states the obligation to introduce mandatory disclosure regimes for cross-border tax arrangements (mandatory disclosure rules, MDR) and automatic exchange of information regarding reported arrangements among EU countries.

The most controversial feature of DAC6 was the imposition of reporting obligations upon intermediaries (intermediaries) – professional advisors who design, organize, implement, or manage tax arrangements, including lawyers, tax advisors, accountants, auditors, financial institutions, and promoters of optimization structures. This obligation arises regardless of whether the taxpayer ultimately implemented the arrangement, meaning that intermediaries must report the mere fact of providing advice concerning a structure satisfying the directive’s hallmark criteria.

DAC6 provided a theoretical exception for intermediaries protected by legal professional privilege – where disclosure of arrangement information would violate an attorney’s professional secrecy protected by national law, the intermediary was exempted from reporting obligations but remained subject to a notification obligation to inform other intermediaries or the taxpayer of their reporting duties. This compromise solution proved unacceptable to legal communities in numerous countries, which argued that the notification obligation itself constituted a professional secrecy violation, as it required attorneys to disclose the fact that they had provided advice concerning a potentially aggressive tax arrangement.

Constitutional Challenges and Judicial Responses

Law firms and bar associations in several countries challenged national provisions implementing DAC6 before constitutional courts and supreme tribunals. In Belgium (2020), constitutional courts ruled that MDR provisions, insofar as they violated lawyers’ legal professional privilege, were unconstitutional.

In Poland, in a judgment dated July 23, 2024 (case no. K 13/20), the Constitutional Tribunal ruled, upon application of the National Council of Tax Advisors, that Polish provisions implementing MDR (Articles 86b, 86d, 86e, and 86f in conjunction with Article 86a of the Tax Ordinance and Article 37(4)(2) of the Tax Advisory Act) were inconsistent with the Polish Constitution – specifically with Article 2 in conjunction with Article 17(1) and with Articles 49 and 51(2) in conjunction with Articles 31(3) and 47 of the Constitution.

The Tribunal did not challenge the reporting obligation for tax arrangements per se, but determined that the provisions failed to sufficiently specify the prerequisites and procedure for exemption or release from professional secrecy obligations. This constituted a violation of the principle of legal certainty and a disproportionate interference with the right to privacy, protection of communication secrecy, and individual informational autonomy. Additionally, the Tribunal deemed Article 28(3) of the amending statute inconsistent with the Constitution (Article 2) insofar as it retroactively imposed reporting obligations for domestic tax arrangements implemented before the statute’s effective date.

The CJEU’s Partial Invalidation: Orde van Vlaamse Balies

The Court of Justice of the European Union (CJEU), in its landmark judgment of December 8, 2022, in Case C-694/20 (Orde van Vlaamse Balies), declared the partial invalidity of Article 8ab(5) of Directive 2011/16/EU (as amended by DAC6) insofar as its application by member states results in imposing upon an attorney acting as an intermediary – when exempted from reporting obligations due to professional secrecy – an obligation to promptly notify any other intermediary who is not their client of the reporting obligations incumbent upon them pursuant to Article 8ab(6).

The CJEU determined that such notification obligation violates Article 7 of the Charter of Fundamental Rights of the EU (right to respect for communications) because:

1. It inevitably discloses the attorney’s identity and the fact that they were consulted regarding a reportable arrangement
2. It is not strictly necessary to achieve the directive’s objectives – information regarding tax arrangements may be obtained by tax authorities from other intermediaries not subject to professional secrecy or from the taxpayer themselves
3. Less intrusive means exist for achieving the directive’s goals without compromising attorney-client communication confidentiality

Significantly, the CJEU did not invalidate the exemption of attorneys from reporting obligations itself – it confirmed that member states may exempt intermediaries from reporting obligations when such reporting would violate professional secrecy provided by national law. Nevertheless, the judgment applies exclusively to attorneys (lawyers) acting within the boundaries of relevant national provisions governing their profession. The CJEU did not expressly determine whether identical protection extends to other tax advisors who are not lawyers, leaving this question to the national law of member states.

DOCTRINAL IMPLICATIONS AND FUTURE TRAJECTORIES

The Asymmetry Problem: Privileged and Non-Privileged Advisors

The CJEU’s Orde van Vlaamse Balies decision crystallizes a fundamental asymmetry in confidentiality protection across different categories of tax advisors. Attorneys may refuse to report DAC6-covered arrangements, invoking legal professional privilege, while other tax advisors (tax advisors under national law, accountants, auditors) lack such protection unless national law explicitly accords them status equivalent to attorneys with analogous professional secrecy protection. The CJEU justified this distinction by reference to the special role of lawyers in the justice system and administration of justice, where attorney independence from state authorities and unconditional protection of client communications are essential to guaranteeing the right to defense and fair proceedings.

This doctrinal architecture creates perverse incentives and potential market distortions. Sophisticated taxpayers seeking confidentiality protection for aggressive tax planning may preferentially engage attorneys rather than equally or more technically qualified non-lawyer tax specialists, not because of superior substantive expertise but solely due to the differential confidentiality regime. This privilege arbitrage potentially undermines the efficiency of professional services markets and may result in suboptimal matching between taxpayer needs and advisor competencies.

Harmonization Challenges in Transnational Tax Administration

The future evolution of these institutions will be shaped by several critical trends. First, increasing digitalization of communications between taxpayers and advisors and between taxpayers and tax authorities necessitates development of novel technical safeguards protecting confidentiality in digital environments, where risks of cyberattacks, data breaches, and unauthorized access substantially exceed those in traditional paper-based communications. The transition to digital tax administration – while offering significant efficiency gains – creates novel vulnerabilities that existing legal frameworks, developed for an analog era, inadequately address.

Second, international tax information exchange requires harmonization of confidentiality protection standards across divergent legal systems, which proves particularly challenging in the context of differences between common law and civil law traditions and between countries with varying levels of rule of law institutional development. The CRS and FATCA regimes assume a baseline level of data protection and rule of law that may not obtain in all participating jurisdictions, creating risks that information exchanged for legitimate tax purposes may be misused for political persecution, commercial espionage, or corruption.

The Scandinavian Alternative: Radical Transparency

Third, tension between legal professional privilege available exclusively to attorneys and the absence of analogous protection for other tax advisors may precipitate legislative reforms extending protection to all categories of professional tax advisors, particularly in light of the fact that contemporary tax law is highly technical and requires specialized knowledge extending beyond traditional legal competencies. The United States’ IRC Section 7525, notwithstanding its limitations, represents one potential model for such extension.

Finally, the debate between the Scandinavian model of tax transparency and the Anglo-American model protecting taxpayer privacy reflects deeper differences in conceptions of citizenship, social trust, and relationships between individuals and the state, which will continue to shape these institutions’ evolution in coming decades. The Nordic countries – particularly Sweden, Norway, and Finland – maintain traditions of substantial tax return publicity, whereby any citizen may access information regarding their compatriots’ reported income and assessed taxes. This radical transparency rests upon distinctive Nordic social democratic values emphasizing collective solidarity, relative income equality, and robust public trust in governmental institutions.

Conversely, the Anglo-American tradition prioritizes individual privacy and conceives tax information as sensitive personal data warranting protection from public disclosure except in exceptional circumstances. These divergent paradigms reflect fundamentally different answers to the question: Who owns tax information – the state, the taxpayer, or the public? Neither model has achieved universal acceptance, and the ongoing dialectic between these approaches will likely persist absent a dramatic transformation in underlying political culture and social values.

CONCLUSION: IRRECONCILABLE VALUES OR PRAGMATIC ACCOMMODATION?

Tax secrecy, tax advisor-client privilege, banking secrecy, and related confidentiality protections occupy the center of a fundamental tension between competing imperatives in contemporary tax systems. The post-2008 financial crisis consensus favoring radical fiscal transparency has achieved remarkable success in dismantling banking secrecy and establishing unprecedented international information exchange mechanisms. Nevertheless, implementation of these transparency regimes encounters mounting resistance grounded in legitimate concerns regarding privacy protection, data security, professional independence, and fundamental rights preservation.

The DAC6 controversy and resulting judicial interventions demonstrate that democratic polities will not tolerate unlimited transparency mandates that eviscerate professional confidentiality and attorney-client privilege. These institutions serve values transcending mere taxpayer convenience – they constitute structural prerequisites for the rule of law, effective legal representation, and maintenance of appropriate boundaries between state power and individual autonomy. The challenge for policymakers in coming years will be to craft carefully calibrated regimes that advance legitimate governmental interests in tax compliance and enforcement while respecting these fundamental countervailing values. Whether such pragmatic accommodation proves achievable, or whether these competing imperatives remain ultimately irreconcilable, constitutes one of the defining questions for international tax law in the twenty-first century.

Robert Nogacki

Founder and Managing Partner of Skarbiec Law Firm, recognized by Dziennik Gazeta Prawna as one of the best tax advisory firms in Poland (2023, 2024). Legal advisor with 19 years of experience, serving Forbes-listed entrepreneurs and innovative start-ups. One of the most frequently quoted experts on commercial and tax law in the Polish media, regularly publishing in Rzeczpospolita, Gazeta Wyborcza, and Dziennik Gazeta Prawna. Author of the publication “AI Decoding Satoshi Nakamoto. Artificial Intelligence on the Trail of Bitcoin’s Creator” and co-author of the award-winning book “Bezpieczeństwo współczesnej firmy” (Security of a Modern Company). LinkedIn profile: 18 500 followers, 4 million views per year. Awards: 4-time winner of the European Medal, Golden Statuette of the Polish Business Leader, title of “International Tax Planning Law Firm of the Year in Poland.” He specializes in strategic legal consulting, tax planning, and crisis management for business.