Do you have
privacy protection if you tell me something as your CPA?
Your first
thought might be yes, as your CPA might be the financial doppelganger to an
attorney.
Then again,
the answer might be no, as your CPA is not in fact an attorney – unless he/she
is one of those rare birds that pairs-up a JD/CPA.
What got me
thinking along these lines is the recent case US v Galloway.
Let’s travel
to 2006. The IRS notifies Galloway that his 2003 return has been pulled for
audit.
Audit
starts.
In the
middle of the audit Galloway’s CPA fires him. Why? Galloway did not pay his
fees.
In 2008
Galloway gets sent to CID (Criminal Investigation Division), the part of the
IRS that carries badges and guns.
As a
heads-up: you NEVER want to deal with CID. It is one thing to argue with regular
IRS, appeal penalties, stretch out a payment plan and so on. All that crowd
wants is your money. CID investigates criminal conduct and they have a different
goal: to put you in jail.
CID agents went
to his business offices in Bakersfield, California. Upon their approach, a man
in the office locked the door and called the police.
The CID
agents also called the police and informed them there were two plain clothed
and armed federal agents waiting for them to arrive.
The man stepped
out of the building and provided them with the name of an attorney. The CID agents
cleared out before the police arrived.
Nothing. Suspicious.
There.
Since that
visit went so well, CID next issued a summons for production of documents to
the former CPA.
The CPA met
with them, explained his relationship with Galloway and answered questions on
how he prepared Galloway’s 2003 return. No great surprise: Galloway had forwarded
QuickBooks information; the CPA asked a few questions, massaged a few numbers
and produced a tax return. Happens in a thousand CPA offices every day.
There was a
smidgeon of a problem, though.
Remember
that the CPA had started the Galloway audit. As part of the audit, Galloway had
provided him more paperwork, including additional and replacement QuickBooks
runs. No big deal - usually.
What was
unusual was that the new QuickBooks runs did not match-up to the earlier run
the CPA used for the tax return.
Galloway was
charged with four counts of attempting to evade tax.
What to do?
Galloway
sought to suppress all evidence obtained from his prior CPA. Why? Code Section
7609. The AICPA Code of Professional Conduct. Equitable authority. Applebee’s 2
for $20 menu.
You get it:
kitchen sink. Galloway was throwing everything he had.
And this
brings us to the Couch case from
1973. It was a Supreme Court case, so it is big-time precedent.
Couch owned
a restaurant. At issue was unreported income. Cash. Pocket. Wink. You
understand.
The IRS
issued a subpoena to Couch’s accountant for books, records, bank statements,
cancelled checks, deposit ticket copies, Sunday newspaper coupons and unexpired
S&H green stamps.
Couch said:
hold up. She had provided all that stuff to her accountant, so subpoenaing her
accountant rather than her personally was nonetheless a violation of her Fifth
Amendment right against self-incrimination.
I like her
argument.
Ultimately –
as Captain Picard would say – her argument was futile.
The Court
was short and swift: Couch had no “legitimate expectation of privacy” upon
providing information to a third-party with the goal of processing, straining
and compressing that same information onto a government tax return.
Back to
Galloway.
As you can
see, he was taking a low-probability swing on a high-and-tight fastball.
He struck
out. He could not make enough separation between his situation and Couch to avoid the precedent.
How do tax CPAs
handle situations like Galloway in practice?
First of
all: interaction with CID is rare. One can have a long career and never see the
criminal side of the IRS.
I have run
into CID once or twice over 30+ years, most recently in connection with a
fraudulent tax preparer in northern Kentucky. I also recently (enough) represented
a client whose file was submitted by Exam to CID, but CID rejected the matter.
The client was eye-rollingly negligent, but Exam hyperventilated (I thought
then and now) and started seeing intent where only stupidity abounded.
Anyway, here
is what the CPA should recommend:
(1) Have the client hire an attorney
(2) Have the attorney hire the CPA
Under this
arrangement, the CPA works for the attorney. He/she is protected under the attorney’s
confidentiality privilege and cannot be compelled to testify unless the
attorney releases him/her. The attorney will not – of course - do any such thing.
This set-up
is called a “Kovel,” by the way. Not surprisingly, it refers to a case by the
same name.
What did
Galloway’s accountant do wrong?
To be fair:
nothing. Galloway was no longer a client. He was under no obligation to chase
Galloway down.
Galloway
really should have thought of that before stiffing the CPA for his fee.
Let’s however
say Galloway was still a client.
Folks, at
the first hint or whiff of a criminal investigation I am (1) firing you or (2)
you are providing me with a Kovel. Those are the only two options.
But it
requires the accountant to recognize the danger signs.
Like a
combined civil-criminal IRS examination, for example. Those are borderline
unfair, as the IRS will pretend there is no criminal side to it. They introduce
an unsettling miasma of entrapment, and they require the tax practitioner to
realize that he/she is being played.
But that is
not what happened with Galloway. CID went to his office, for goodness’ sake.
There was
not a lot of subtlety there.
