You’ve Been Served… Tips for Accountants Handling Subpoenas

Accountants are among the most subpoenaed professions; accordingly, it should come as no surprise that there will likely come a time in an accountant’s career when a process server or federal agent walks into the office, hands over documents and says “you’ve been served.” Once the shock wears off, remember, it’s just a subpoena – but now what?

A subpoena is a common legal document that can be served on an accountant or firm whether they are a party to a case or a target of an investigation. Subpoenas can:

• Come in several forms: a discovery subpoena, a trial subpoena or a government agency subpoena.
• Be generated from civil litigation, criminal prosecutions or government investigations.
• Call for documents, testimony or both.

Subpoenas generally are served because the issuing party does not have access to the documents or information the accountant maintains; however, subpoenas can be issued to confirm the veracity of documents or information already in the subpoenaing party’s possession. Subpoenas can call for tax returns, accounting workpapers, communications with clients or all of the above. Whatever type of subpoena is received, it is important to recognize that each comes with a mountain of risk and should be reviewed carefully, and any responses should be positioned to protect the interests of the client and the accountant.

Upon receipt of a subpoena, the accountant should engage a knowledgeable attorney familiar with the accounting profession and its regulatory, ethical and legal obligations to assist in crafting a response. In addition, the accountant should review any existing errors & omissions policies to determine if specific subpoena assistance coverage is included, and consider contacting their broker or carrier, if appropriate

There is the possibility that the information produced by an accountant in response to a subpoena could form the basis of a subsequent claim of malpractice. Therefore, in response to every request for information or subpoena, an accountant should examine the engagement in question to assess the possibility of a lawsuit.

Common Subpoena Issues

Subpoenas served on accountants most commonly arise from civil litigation involving a client or former client. Whether the matter is a divorce between longtime clients or a business dispute involving a corporate client, civil subpoenas often are served on the parties’ accountants to secure financial records and information about the client. However, many lawyers who serve subpoenas do not realize that, pursuant to I.R.C. 7216, tax return information is protected from disclosure in response to a civil subpoena. Accordingly, when a subpoena requests tax returns and related information, an accountant should advise the issuing attorney that an executed 7216 authorization form needs to be secured from the taxpayer authorizing such disclosure.

If the subpoena arises from a criminal matter, it is most likely a “grand jury” subpoena issued by a state district attorney’s office or a U.S. Attorney’s Office. The regulations implementing I.R.C. 7216 contain exceptions to allow for production of materials in response to grand jury subpoenas regardless of client consent.

In addition, I.R.C. 7525 provides for a limited tax practitioner privilege, and some states have passed evidentiary accountant-client protections similar to attorney-client privileges that raise additional complexities in responding to a subpoena.

Should You Tell Your Client?

Another question often raised by subpoenaed accountants is whether to inform the client that its records have been subpoenaed. Generally, there is no legal obligation on subpoena recipients to maintain the confidentiality of the existence of a subpoena. However, occasionally a subpoena is accompanied by a court order requiring confidentiality, which must be respected.

In other situations, especially with criminal or investigatory subpoenas, the subpoenaing agency “requests” that the accountant keep the existence of the subpoena confidential. These requests generally do not have the force of law, but there may be compelling reasons to comply. However, whatever the reason, confidentiality must be weighed against the accountant’s duties to its client or former client.

Costs of Responding

Ideally, every engagement should have an engagement letter that contains a provision whereby the costs incurred by the accountant for responding to subpoenas will be reimbursed by the client. Specifically, such provision should include attorney fees. Most clients recognize that if they are involved in litigation or another activity that causes their accountant to incur costs, the accountant should be able to bill them for the professional time spent dealing with the requests and the legal fees incurred to ensure proper compliance with the subpoena. To avoid disputes with clients, the accountant should consider providing for such fees in the engagement letter.

In some states, ancillary compensation is set by statute, in others it is limited to photocopying or similar expenses. In most cases, the actual costs incurred (expenses, lost professional time, attorney fees) are significantly greater than the usual compensation for services rendered.

Conclusion

Responding to subpoenas can present numerous risks to the unwary accountant. Divulging certain information at the wrong time in the wrong circumstances to the wrong parties can be a crime, an ethical violation or a breach of an accountant’s duties to the client, leading to potential liability. Moreover, divulging information, properly or improperly, may provide a potential plaintiff with the ammunition to bring a malpractice claim against the accountant. Consequently, the best course when served with a subpoena is to contact legal counsel and notify the insurance carrier.

Meet the Author

Rebecca R. Gelozin is a partner in the White Plains, New York, office of national law firm Wilson Elser. She has experience representing accounting firms and related organizations in a full range of legal matters. Ms. Gelozin provides advice and representation in connection with regulatory investigations and proceedings, risk management, ethics proceedings, and transactional matters. She also advises on partnership agreements, cyber breaches, and personnel issues, among other areas.