CPA Duties of Confidentiality
By Stephanie Sessions Perkins
What should you do when in receipt of an information request that may or may not be valid? What should you not do?
The rules seem simple enough. Rule 301 of the American Institute of Certified Public Accountants’ professional standards has long recognized that a member CPA “shall not disclose any confidential client information without the specific consent of the client.” The main exception to that rule occurs when the CPA is responding to a “validly issued and enforceable subpoena or summons” or complying “with applicable laws and government regulations.”
The Internal Revenue Code (IRC) is even more specific in prohibiting disclosure. IRC Section 7216 makes it a misdemeanor for any tax return preparer to release any tax information obtained or generated in the course of a preparer-client relationship, unless the preparer has express client consent, or a court order has been issued. Violation of this rule is subject to a fine or imprisonment or both.
The main distinction between these rules is that the AICPA standards are not rules of law, but are merely standards by which members will be judged in a professional context, while the IRC is law, and failure to comply can create serious legal implications for the CPA.
CPAs are often justifiably confused about what rules apply when trying to determine whether appropriate taxpayer consent has been given, or whether they have been served with valid legal process (e.g., a subpoena) to release records or to submit to a deposition or interview regarding tax matters. These circumstances can occur in both civil and criminal cases involving the CPA’s client and they are far from simple to navigate. Because of myriad state and local regulations that may impose other requirements, whenever you are asked to respond to either a formal or informal request for information regarding a client, you should seek the advice of your legal advisor to ensure you are in compliance with such regulations.
Accountants often receive written or verbal requests for information or records regarding a tax client. The first question to be answered to satisfy the AICPA standard and the IRC is, “Who is the client?”
The client is the company or individual to whom the service is rendered, not necessarily the third-party investor, attorney or regulatory agency asking for the information. If the client has given written permission for the CPA to release the information, ordinarily both the IRC and AICPA rules requiring consent have been met. If the requesting party is not the client, the CPA should request that it obtain written consent before going any further.
Internal Revenue Service agents (as well as those with other agencies) sometimes deal with the investigation of criminal activity. Most often an investigation relates to the actions or documents (e.g., tax return) or both of the CPA’s client or a third party.
The agent will sometimes appear at the CPA’s office without an appointment, asking for information about a client. The agent wants to catch you off guard.
What should you do? First, after your pulse stops racing and you overcome your “fight or flight” response, relax. Unannounced visits by agents happen more often than you’d think. Second, keep in mind that the agent is not entitled to confidential information unless he or she has a subpoena or court order. Accordingly, although you should indicate your interest in cooperating, it is appropriate to defer any comments or release of records until you seek advice from your legal counsel. (See “Grand Jury Subpoenas” discussion below.)
Do you have to comply? It depends. Civil subpoenas are a method by which a party to litigation will request information from a third party. In many cases, that third party is you, the CPA for the adversary of the requesting party. Subpoenas come in various forms: some seek only documents, some also seek testimony (e.g., depositions). Keep in mind that although they may appear formal, not all subpoenas are valid or enforceable. Validity and enforceability are not always evident from the subpoena itself and can be tricky for the CPA to determine.
Whether the CPA will be required to produce any or all of the documents, or give a deposition, will depend on various factors. Therefore, don’t assume that the subpoena is proper because it appears to be legal. On the other hand, don’t ignore the subpoena, even if in the throes of tax season. Many assume that the subpoenaing party “can get that information from my client,” But this rarely is a valid excuse for failing to respond and can result in difficulties with the court.
Practically speaking, if the subpoena is valid, it meets the AICPA standard that permits disclosure in response to a validly issued and enforceable subpoena. However, this does not typically overcome the IRC restriction. In fact, attorneys representing CPAs regularly take the position that a civil subpoena is not the “court order” required under the IRC. Unless your client has agreed in writing that you may respond, or a court has issued an order directing you to respond, you cannot produce the records or testify. A word to the wise: contact your risk advisor or attorney before you take action.
Grand Jury Subpoenas
Do you have to comply? Probably. A grand jury subpoena is a method for a federal grand jury to gather evidence in a criminal matter sufficient to consider indictment. Although it does not imply wrongdoing on the CPA witness’s part, it should not be taken lightly.
Typically, if an IRS agent delivers a grand jury subpoena, it most likely is in order. One of the clear exceptions to the strict IRC section forbidding disclosure of tax records is the grand jury subpoena. Read the subpoena carefully, however. Some require documents, some require testimony, some require both. Because of your duties under both the IRC and AICPA standards, as well the broad-reaching implications and gravity of grand jury investigations, you should never volunteer documents before the due date stated on the subpoena, or agree to an “informal” interview without first conferring with your counsel.
Note that if you receive a subpoena to produce only documents, you will be violating both IRC and AICPA rules if you give the agent an interview or meet with him or her about the client. Further, as with any subpoena, it is wise to review the actual documents being produced to be certain they fit the description of documents requested in the subpoena.
Now that you are armed with more knowledge about the rules of disclosure, you will be better prepared to respond to requests for confidential tax information. The best rule to follow is to seek guidance when in doubt. Remember, if you feel as though you are volunteering information, there is a good chance you are running afoul of the rules.
As always, call Camico with any questions at 800-652-1772, or e-mail questions to Camico claims services at firstname.lastname@example.org.
Stephanie Sessions Perkins, JD, is staff counsel with the claims department of Camico. She consults with claims professionals and policyholders, and assists in directing outside legal representation of policyholders in pre-litigation, risk management matters. Perkins represents CPAs in non-party subpoena and summons matters, federal and state civil and criminal regulatory investigations, and employment issues. She earned her juris doctor from Loyola Law School and was admitted to the California Bar in 1987.
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