Conversations between you and your clients may be shielded from disclose to third parties, if the accountant-client privilege applies.
Some Jurisdictions Recognize an Accountant-Client Privilege, While Others Do Not
The accountant-client privilege precludes the disclosure of confidential information shared by a client with his or her accountant. The purpose of the accountant-client privilege is to create an atmosphere in which the client is able to provide all relevant information to an accountant without fear that the information will be disclosed subsequently. In other words, many legislatures have recognized a public benefit in encouraging people to use professional accounting services and to be candid with such professionals. Without this protection, clients might withhold information that would preclude a CPA from adequately advising the client or otherwise performing his or her services.
Federal law does not recognize a general accountant-client privilege. A federal statute does provide a limited shield of confidentiality for communications between a federally-authorized tax practitioner and his or her client. 26 U.S.C. § 7525(a). This statutory protection, however, is narrow. It merely extends confidentiality protections to the same extent these communications would be privileged if they were between a taxpayer and an attorney.
Several states do, however, expressly recognize an accountant-client privilege. This includes, for example, Florida, Pennsylvania, Colorado and Missouri. Thus, in lawsuits filed in these state courts, such information may be privileged. In lawsuits filed in federal court that apply federal law, information exchanged between a CPA and his or her client will not be shielded from disclosure. If, however, the federal court is applying state law, the court will look to the same state’s laws to guide the privilege issues. Thus, it is possible that even in federal court proceedings, the privilege may sometimes apply.
Typically, a party asserting the privilege bears the burden of establishing the applicability of the privilege. And state laws differ as to who can assert the privilege. For example, in some jurisdictions, the accountant can assert the privilege. But under other state laws, the accountant-client privilege belongs to the client. And some state statutes provide that the privilege only applies to communications with CPAs licensed or registered in that state.
State law again differs as to what a proponent must show to establish the privilege. As an example, in one jurisdiction, the party asserting the privilege must show the following:
- The communications must originate in a confidence that they will not be disclosed;
- The element of confidentiality must be essential to the full and satisfactory maintenance of the relations between the accountant and client;
- The relation must be one which in the opinion of the community ought to be diligently fostered; and
- The injury that would inure to the relation by the disclosure of the communication must be greater than the benefit thereby gained for the correct disposal of litigation.
In states recognizing the privilege, at a minimum the proponent must usually show that the information communicated was related to the services rendered by the CPA to the client.
Exceptions to the Privilege
Even in states in which the privilege is recognized, it is subject to certain exceptions and can also be waived. For example, typically the privilege does not apply to information disclosed to third parties or where the confidentiality of the information is not otherwise preserved; this can be true even if the information is inadvertently disclosed. Additionally, disclosure of information in a tax return may waive the privilege as to not only the information disclosed in the return, but also the data underlying that information.
The client may also waive the privilege through conduct inconsistent with its assertion. For example, take an insurance policy requiring the client to cooperate with its insurer by providing financial information for a business interruption claim. If that financial information is protected by the privilege, filing a lawsuit seeking insurance coverage might entitle the insurer to the otherwise protected information.
Similarly, in a malpractice action filed by a client against his or her CPA, privileged communications between the client and CPA may be admissible into evidence. Many state statutes establishing the privilege contain also a crime/fraud exception: If the information is being used to commit a crime or fraud, it is not subject to the protections of the statute.
These exceptions are consistent with the general rule that privileges are construed narrowly, because they inhibit the search for truth.
Other Confidentiality Protections and Requirements
Keep in mind that certain tax advice provided by an attorney may be protected by the attorney-client privilege, which has its own separate requirements. The preparation of a tax return, however, is typically not considered legal advice subject to the attorney-client privilege. And accounting advice, even if given by an attorney, is not privileged. If, however, an attorney shares privileged information with a CPA who is hired to assist the attorney in understanding the client’s information, this should not waive the attorney-client privilege.
Also, even though the information your client gives you may not be subject to an accountant-client privilege, this does not mean that you do not have an obligation to nonetheless keep the information confidential. The privilege, when applicable, simply prevents a third-party from forcing the disclosure of that information. But there may be other contractual or statutory obligations that prohibit CPAs from voluntarily disclosing client information.
Conversations and information disclosed between CPAs and their clients may or may not be privileged. Usually, it is safest to operate on the assumption that the information exchanged will not be privileged, but at the same time maintain the confidentiality of any information received. If a third-party seeks access to that information, depending on the applicable law and circumstances, there may be arguments to avoid disclosure. If you do receive a demand to produce a client’s information, whether it be by subpoena or otherwise, discuss the request with your client and consider whether a privilege applies that may preclude disclosure.
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Jason M. Rosenthal, JD, is a managing partner of Schopf & Weiss LLP, a national business litigation firm based in Chicago that has been using alternative fee arrangements for several years. For more information, please contact him at 312-701-9300