Consider the following scenario where a CPA has prepared a joint Form 1040 for a husband and wife for several years and routinely provides professional services to both spouses related to several separate and joint business ventures. CPA receives a call from the husband stating that he has been informed his wife intends to divorce him. The husband wants to discuss the preparation of a joint return for the couple and wants specific advice as to potential tax positions or other accounting, legal advice that could help the husband prevail over the wife in negotiating an advantageous marital assets division and support agreement.
Any advantage secured for H will likely be disadvantageous to W. CPA will be unable to perform with 100% neutrality and thus will not be able to meet the objectivity, competency, and diligence standards required by Circular 230, the AICPA and most state prescribed ethical performance standards. Consequently, the CPA should not prepare a joint return for H and W nor should he or she provide counsel to “seek an advantage by H over W in the coming divorce” even if both H and W are willing to sign informed consents. Moreover, the potential exists for prosecution of the CPA for the unauthorized practice of law where legal advice is provided related to the divorce even where the advice provided is competent.
Where the CPA is the original preparer of returns subsequently found to be fraudulent before a divorce court, the CPA understandably has a strong motivation to protect their reputation with the taxing authorities at the expense of the client’s reputation with the divorce court and possibly at the expense of the client’s liberty where the IRS later peruses the public record underlying the divorce and discovers the tax fraud. This makes the CPA a great candidate to be government witness number one in establishing the client’s willful tax evasion especially where the client provided the CPA incomplete or worse yet a cooked set of books that the CPA relied on to prepare the fraudulent tax return(s) at issue.
A preparer, even where they are an attorney, does not have attorney client privilege and anything that the client said to the preparer related to the preparation of the return can be used against the taxpayer in a court of law. If Subpoenaed as a witness, the CPA can face contempt of court charges if they refuse to testify which includes the potential for indefinite arrest and or compounding monetary fines until the CPA decides to cooperate. The CPA’s tax advice privilege under Section 7525 is unavailable when a matter turns criminal.
Only the client can waive federal section 7525 privilege and any state law based confidentiality privileges with the CPA. Thus, a CPA, should seek counsel when presented with a court or a taxing authorities request for documents or to answer questions / be deposed. The CPA should put the client on notice of the request and seek permission to allow themselves to be questioned or before disclosing any confidential matters or client documents. Without first obtaining permission, The CPA should not disclose or provide anything absent a valid court order or subpoena. Furthermore, it is important to note that a taxpayer’s delivery of personal papers to a CPA can effectively waive any Fifth Amendment production privilege that might exist.
This question frequently arises in CPA divorce engagements when serving in the capacity of a forensic accountant. CPA are also asked to review and sometimes prepare tax returns in a divorce engagement. A CPA hired to be an expert and to offer testimony in open court be definition has no work product privileges and thus his or her work product is discoverable before the divorce court and where a criminal tax issue subsequently arises. Where fraud may be evident in tax returns before the divorce court the enlightened attorney will choose to directly engage a qualified Criminal Tax Defense Attorney or Kovel accountant whom is completely separate from the testifying expert.