Subpoenas, accounting firms, client records

[Stephen1]

This is NOT a political discussion.

I'm thinking about the current thing with NY state subpoenaing an accounting firm for records they hold relating to President Trump's taxes. The accounting firm has received a subpoena. The client has said - don't provide those records.

Assuming that it is a valid subpoena and that someone is required to provide those records, then who gets into trouble for not complying with such a subpoena? Is it the accounting firm or the client?

Personally I would never be in this position. Being a small operator I believe that if my CPA received a subpoena for my records and I said don't supply them then the CPA would probably still supply them because the CPA's loss of my future business would be negligible.

 

[Taxing Matters]

Assuming that it is a valid subpoena and that someone is required to provide those records, then who gets into trouble for not complying with such a subpoena? Is it the accounting firm or the client?

It would be the accounting firm that was served with the subpoena. If the client believes that the subpoena is improper, the client may file in court to quash the subpoena.

 

[PayrollHRGuy]

The SCOTUS has at least temporarily halted the subpoena. I don't think you or I would have the stroke to get the SCOTUS to give a crap.

 

[davew9128]

There are a couple of issues at play with this. There is taxpayer confidentiality under IRC 7216, and the delineated exceptions to that privacy. Those privacy laws apply to the paid preparer of the tax returns as well as IRS. Often times I get asked what to do if an opposing party's attorney were to request records from me, what my response would be. It's usually along the lines of informing said attorney to take a sex toy and insert it somewhere in their posterior. IRS OPR has publicly backed that stance, if not the colorful language. However when a law enforcement agency requests documents, the legal protection diminishes and as Taxing Matters points out, the legal remedy is to find a way to quash the subpoena.

Another aspect to this is the scope of the records request. IRC 6107 only requires Trump's CPA firm to keep a list of tax returns for three years. The problem they are running into is symptomatic of many accountants, in that they keep all documents for either a very long time or forever. Had they kept only documents for a length of time related to a tax statute of limitations, they could reasonably tell the DA to pound sand for the older end of the document request.

 

[Zigner]

There are a couple of issues at play with this. There is taxpayer confidentiality under IRC 7216, and the delineated exceptions to that privacy. Those privacy laws apply to the paid preparer of the tax returns as well as IRS. Often times I get asked what to do if an opposing party's attorney were to request records from me, what my response would be. It's usually along the lines of informing said attorney to take a sex toy and insert it somewhere in their posterior. IRS OPR has publicly backed that stance, if not the colorful language. However when a law enforcement agency requests documents, the legal protection diminishes and as Taxing Matters points out, the legal remedy is to find a way to quash the subpoena.

Another aspect to this is the scope of the records request. IRC 6107 only requires Trump's CPA firm to keep a list of tax returns for three years. The problem they are running into is symptomatic of many accountants, in that they keep all documents for either a very long time or forever. Had they kept only documents for a length of time related to a tax statute of limitations, they could reasonably tell the DA to pound sand for the older end of the document request.

Just a minor quibble: A "law enforcement agency" doesn't issue subpoenas.

 

[davew9128]

Just a minor quibble: A "law enforcement agency" doesn't issue subpoenas.

Would you consider a District Attorney's office to be one? I would.

 

[Zigner]

Would you consider a District Attorney's office to be one? I would.

The District Attorney is acting as an officer of the court when issuing a subpeona. Brush up on the 3 branches of government.

 

[PayrollHRGuy]

A US District Attorney works for the Department of Justice and is in the executive branch. All states that I know of are the same though many have elected Attornies General and are separated to some extent from the Executive Branch.

The US AG has long been known as the Nation's Top LEO.

 

[davew9128]

The District Attorney is acting as an officer of the court when issuing a subpeona. Brush up on the 3 branches of government.

So are private attorneys. Suggest you do the same.

 

[Zigner]

So are private attorneys. Suggest you do the same.

Yes, I agree, but you specifically asked about the District Attorney.
A subpoena is issued by the COURT, not "law enforcement". It really is pretty straight-forward. We've all made mistakes...the gracious among us cheerfully acknowledge it.

 

[Taxing Matters]

There are several court cases involving efforts to obtain Trump's financial records, including tax returns. The main crux of the President's defense to them is the claim of executive privilege. That's an issue no one else in the country could raise. And the reason the Supreme Court is willing to hear it so readily is that it does involve a very significant constitutional issue, just as the court has done in previous situations where executive privilege is at issue.

Although not terribly important here, I will note that IRC § 7216 allows an exception to the offense of improper disclosure of a client's information by a return preparer for disclosures made pursuant to a court order. Where those subpoenas are issued by authority of the court (and not all subpoenas are) the return preparer must comply with the subpoena, whether it was issued by a law enforcement agency or by an attorney in a civil case. And yes, the attorney as an officer of the court does issue the subpoena, but the subpoena is backed by the authority of the court.

 

[davew9128]

Just to clarify the IRS's official view on this, here is on the record comments from the Director of Practice, the division which handles enforcement for credentialed tax practitioners:

Director Stephen Whitlock, Office of Professional Responsibility, requested the following response be shared with all participants:

During the webinar, several questions were received about the appropriate response to a subpoena for client records – in a situation where the client is a party in civil litigation regarding a non-tax matter.

The context of the questions suggests:

• • information subpoenaed relates to Federal income tax returns,
• • questioners were compensated preparers of the tax returns.

In cases like this, a tax return preparer should not disclose, pursuant to the subpoena, client tax returns or the associated work papers the preparer used or obtained in connection with the preparation of the tax returns.

Clarification:

• • OPR is not suggesting a preparer who receives a subpoena should ignore it.
• • The preparer should tell the attorney, who issued the subpoena, that the preparer is prohibited by federal law from complying with the subpoena.
• 
  
  • Specifically, I.R.C. § 7216 and its regulations
• 
  
  • These rules prohibit disclosure of tax returns and tax return information without the taxpayer’s consent, unless an exception applies, and the situation presented by the questions is not an exception.
• • The preparer should tell the attorney to, instead, obtain a court order for the records.
• 
  
  • Presumably, an order from the court presiding over the litigation.
• • Upon receipt of a valid court order:
• 
  
  • that orders the disclosure of the client’s tax returns,
• 
  
  • to an attorney representing an opposing party in a lawsuit filed by or against the preparer’s client or former client,
• 
  
  • THEN the practitioner/preparer is authorized to disclose copies of the tax returns to the named attorney.
• • OR the preparer could disclose the records to the attorney after obtaining the client’s written consent to the disclosure.

CAVEAT: A person served with a subpoena should consider obtaining advice from a lawyer about how to handle and respond to the subpoena, as the information provided above should not be relied on as a definitive answer for all facts, circumstances, and the rules or legal requirements of the locality in which the subpoena was issued.

https://content.govdelivery.com/accounts/USIRS/bulletins/1d8b708

 

[Taxing Matters]

CAVEAT: A person served with a subpoena should consider obtaining advice from a lawyer about how to handle and respond to the subpoena, as the information provided above should not be relied on as a definitive answer for all facts, circumstances, and the rules or legal requirements of the locality in which the subpoena was issued.

The above is important because not all subpoenas are the same, as I indicated in my earlier response. If the civil subpoena under the applicable federal or state law is treated as an order of the court then by the express terms of IRC § 7216 and the related regulations the disclosure is not prohibited and in that case the practitioner may find himself/herself facing sanctions from the court for refusing to comply. If a tax practitioner does not know the law related to the particular subpoena he or she receives, that tax practitioner should consult an attorney to determine what his/her responsibilities are.

 

[Stephen1]

Just a side note, I believe that the State of New York (or is a Commonwealth) was subpoenaing the state tax records and not the federal records.

I'm thinking that if the responsible party (that is, the party that will get into trouble with the court if they don't provide whatever has been requested) is the accounting firm, then what grounds for input does the taxpayer have. He is not being required to provide anything. But if the taxpayer is the responsible party then why wasn't the subpoena issued to him?

 

[Taxing Matters]

I'm thinking that if the responsible party (that is, the party that will get into trouble with the court if they don't provide whatever has been requested) is the accounting firm, then what grounds for input does the taxpayer have. He is not being required to provide anything.

The taxpayer may go to court to quash the subpoena if he/she has grounds for it because it is his/her information that is being sought.