Welcome to the final section of Ethics, Professional Responsibilities, and Federal Tax Procedures. The first 4 chapters of this series is approximately 10% to 20% of the exam and will cover all topics regarding a tax preparers responsibilities as it relates to federal taxation. In the final lesson of this series I will outline the communication between a tax preparer a client and a third-party. Here are today’s learning outcomes:

• Summarize the rules regarding privileged communications as they relate to tax practice.
• Identify situations in which communications regarding tax practice are considered privileged.

Accountant-Client Privilege

As a general rule: accountant-client privilege is nonexistent in federal courts. If a federal court requests documentation concerning the communication between your client and yourself then you must comply. You can’t proclaim, “I have accountant-client privilege” because they will laugh you out of court. Here are some instances where accountant-client privilege doesn’t exist (for the most part):

• Criminal cases
• Cases involving the IRS or the U.S. government
• Cases involving tax advice
• Pretty much any case

The only exception is when an accountant is giving legal advice. If the accountant is giving general accounting advice then that communication is free game.

Example 1: An accountant is representing his client in Tax Court and therefore his communication is privileged.

Example 2: An accountant is giving general accounting advice related to the preparation of a tax return. Any and all communication regarding this matter may be attained by federal courts or the IRS.

This is spelled out in detail in U.S. Code § 7525 but as a general rule just know: accountant-client privilege only exists to the extent that the communication would be considered privileged if it were between a taxpayer and an attorney. In layman’s terms, if an accountant is acting like an attorney and giving legal advice or defending their client in court than that communication is privileged (everything else is fair game).

Disclosure

Just because client information can be easily accessed through a court order doesn’t mean you don’t have any responsibility over the confidentially of your communication. On the contrary, there is a high level of scrutiny when it comes to the disclosure of client information.

As a general rule: an accountant can’t disclose client information unless:

1. There is a court order or subpoena.
2. It is required by law or applicable accounting principles.
3. Disclosure of information involves peer review through the AICPA.
4. The information is already public information.
5. Client waives their right by signing a consent form.

In all other scenarios you should keep your client data safe and secure. Illegal disclosure of client information carries steep penalties – both civil and criminal. CPA’s that disclose client information without their consent and in an illegal manner may lose their license and be banned from practice.

Keeping Client Information Safe

Accountants owe their client a duty of care when it comes to their information. Being reckless in your handling of confidential client information can be just as bad as improperly disclosing client information. The following are just a few examples of ways accountants can show due care:

1. Storage – accountants should maintain safe storage of client information both physically and digitally.
2. Access – access to client information should be limited to certain personnel. Not everyone in the firm should have access to every client’s information.
3. Disposal – accountants should dispose of client information in such a way that safeguards the clients information. You don’t want to be throwing away tax forms with social security numbers for anyone to find.
4. Disclosure to third-party – If an accounting firm is using some type of third-party to complete a tax return or other client engagement then it’s a good idea to get the client’s consent.
5. Policy, procedures and enforcement – accountants should create a policy with procedures on how client information is collected, handled, stored, accessed, and disposed. These can’t simply be a written policy but instead an active enforcement of client confidentiality.

Key Takeaways

1. Accountant-client privilege is nonexistent unless the accountant is giving legal advice or defending their client in court.
2. Accountants can only disclose information from a court order, peer review, or through the consent of the client.
3. Accountant has a responsibility to keep their client’s information safe to avoid accidental disclosure.