Many CPAs are unsure what to do when they receive a subpoena. Complying with a subpoena without seeking proper counsel can actually create more problems, because CPAs are subject to a labyrinth of rules that restrict or prohibit disclosure of client information.

This CAMICO case study on “Responding to Subpoenas” contains advice about some things CPAs should review before stepping into the witness box, and practical guidance on what to do before responding to a subpoena. 

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Know When to Blow the Whistle

A CPA had been engaged for a few years by the trustee of a substantial family trust. While preparing tax returns and compiling financial statements for the trust, the CPA came across evidence indicating that the trustee was probably misappropriating trust funds. The CPA requested more information from the trustee but received nothing.

What was the CPA to do? By whistle-blowing and disclosing confidential client information to the trust beneficiaries, who are considered third parties to the trust, the CPA would have been in violation of the rules of confidentiality. The CPA therefore decided to wait for more information to develop before taking any action.

Meanwhile, a special agent from the criminal investigations unit of the Internal Revenue Service made a surprise visit to the CPA’s office. The agent flashed her badge, handed the CPA a subpoena, and requested an interview regarding the trustee in question. The CPA felt somewhat intimidated and wanted to cooperate with the agent, especially in light of his concerns about possible misappropriations by the trustee. The CPA agreed to the interview and decided to blow the whistle on the trustee by divulging information about the trustee’s suspicious financial dealings.

Several weeks later, the attorney for the trustee filed a complaint with the state board of accountancy against the CPA for improperly disclosing confidential client information to the IRS agent, whose subpoena called for documents but not for interviews or depositions. The complaint included criminal and civil allegations of misconduct and negligence. Although the CPA spent many work hours responding to the state board’s requests for information, it ultimately turned out that the trustee was indeed misappropriating trust funds, and the complaint was withdrawn. However, this case is instructive on several points.

By seeking advice from legal counsel or your risk adviser and getting the advice in writing, the CPA could have gained a certain degree of protection from complaints that he violated client confidentiality rules. If counsel decides that the best course of action is to blow the whistle on a client in order to protect third parties or the public from potential fraud, the CPA can assert that he or she was acting on the advice of counsel with the intention of preventing the further defrauding of third parties.

Responding to Subpoenas

Although CPAs should indicate their interest in cooperating with subpoenas and other requests for information, it is appropriate to defer any comments or release of records until you receive advice from an attorney or your professional liability insurance risk adviser. There are numerous reasons why, including:

  • Some subpoenas require documents, some require testimony, and some require both. Here are some proactive guidelines:
    • Do not volunteer information. You will be violating rules of the Internal Revenue Code and AICPA if you provide more than what is requested in the subpoena.
    • Under no circumstances should you give interviews to an agent when the subpoena requests documents only; nor should you ever give an interview without first seeking legal guidance.
    • Be sure that the documents being produced fit the description of the documents requested in the subpoena.
    • Never volunteer documents or other information before the due date stated on the subpoena without first consulting a qualified attorney or your professional liability insurance risk adviser.
  • Not all subpoenas or requests for information are valid and enforceable, and it can be difficult to determine from their face whether they are valid or enforceable.
    • Do not assume that the subpoena is proper just because it appears to be legal. You could err by improperly responding to an invalid subpoena.
    • At the same time, do not ignore a subpoena. Failing to respond can result in difficulties, including court-imposed penalties or fees.
  • Even if the subpoena is valid, it might not meet the Internal Revenue Code requirements for release of client tax information. Simply complying with a subpoena could result in fines or penalties and may expose a CPA to liability from the client.

These are practical guidelines only, not legal advice. Seek legal advice before taking any action or making any related decision. It is also important for CPAs to notify their professional liability insurance company to assure their coverage in the event of a claim.

By working closely with attorneys, insurance carriers and other risk specialists to determine whether and how to blow the whistle, the CPA is likely to avoid severe penalties and emerge from these challenging situations intact.

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