Subpoenas and disclosures of client records: New rules for the old statutes
"There's a constable at the door and he has a subpoena for our client's records."
Not exactly the first words you want to hear from your assistant on Monday morning. And what's worse, if receiving a subpoena for your client's documents isn't jarring enough, you'll soon learn that there's much more to worry about than simply thumbing through old file cabinets and storage boxes to locate client files.
There's the issue of the accountant-client privileges, both state and federal. These privileges apply not only when a subpoena is involved but any time confidential client information is to be disclosed to persons outside your firm or to use that information for anything other than preparing the tax return.
For years, both the Texas State Board of Public Accountancy (TSBPA) and the IRS have had rules on the books about keeping client's information confidential. But, as of Jan. 1, 2009, the IRS has changed the rules to make them much stricter. These new IRS rules, based on IRC §7219 and found in Code of Federal Regulations §§301.7216-1 through 301.7216-3, have been supplemented by Internal Revenue Bulletin 2008-35. Not to be out done, the TSBPA has also changed its rules, effective Jan. 28, 2009.
There are some circumstances that the IRS rules do not cover. Keep in mind, though, that even if the IRS rules don't cover your circumstance, the Texas rules, found in the Occupations Code at §901.457 and in the TSBPA's Rule 501.75, may very well prohibit or limit the disclosure or use of the client's confidential information.
First of all, the IRS rules only apply to tax return preparers. Additionally, the IRS rules generally do not cover certain circumstances such as disclosures to the IRS, within a CPA firm, to related taxpayers or fiduciaries, to secure legal advice or in court proceedings, to obtain a peer review or to report a crime. Additionally, the information can be disclosed pursuant to an order of a court, or an administrative order, demand, request, summons or subpoena which is issued in the performance of its duties by a federal or state agency, the United States Congress, a professional ethics committee or board or the PCAOB.
If your situation doesn't fit into one of the exceptions, then you're going to have to get the client's consent before you can disclose the information to someone other than the client. The consent must be in writing and given voluntarily by the client only after the client knows what his or her consent means.
All consents must include: (1) the name of tax return preparer, (2) the name of the taxpayer, (3) the intended purpose and specific recipient of the disclosure or particular use authorized, and (4) the tax return information to be disclosed or used. Additionally, the consent must be signed and dated by the taxpayer. No retroactive consents are allowed, the consent will last for one year unless it specifies otherwise and, although the consent can be for multiple uses or multiple disclosures, it cannot be for both uses and disclosures. If a consent covers an entire return, it must provide that the taxpayer has the ability to request a more limited disclosure. Finally, the client must be given a copy of the executed consent at the time of the execution.
Did you get all that? Well, it gets worse if the documents include any 1040 series returns. Then, the IRS rules provide that the consent must be on 8½” x 11” paper, be in 12-point font and include a series of standard language paragraphs depending on the circumstances; including a number for the taxpayer to call to report you if you get it wrong.
There are even more rules if you want to do any of this using a webpage or when the disclosure or use of the information involves a foreign tax return preparer.
For nontax clients, only the Texas rules apply. You'll have to get the client's consent unless the disclosure is made: (1) pursuant to your reporting requirements under professional standards, (2) pursuant to an IRS or SEC summons or a court order that is addressed to the CPA, mentions the client by name, and requests specific information, (3) in an investigation or proceeding by the TSBPA, (4) in an ethical investigation conducted by a professional organization of CPAs, or (5) in the course of peer review.
So if you are served with a subpoena for your client's records, check to see if it's for a tax client. If it is, you'll need to follow the IRS code, regulations and state law, and if it's for a nontax client, you can concentrate on the Texas rules. Before making any disclosure to anyone other than your client, whether related to a subpoena or not, you'll need to familiarize yourself with the IRS regulations, rules and bulletins, along with the Texas statute and rules, or contact your legal counsel for advice.
By Richard M. Forrest, JD, CPA, and Frank L. McElroy, JD, MBA
This article was originally published in the CPA Forum published by the Houston, Texas, CPA Society and is reprinted here with the permission of the society and the authors.
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