Tax prosecution: how to keep your clients--and yourself--out of jail.

• Position: Advisingclients

CPAs may sometimes be the first people contacted when their clients are faced with an actual or potential criminal tax investigation. To protect the client, along with guarding against personal exposure. a CPA must know in advance what legal and ethical considerations are at issue. Under normal circumstances, CPAs offer invaluable professional advice. The emergence of a criminal tax issue in a client's fact pattern. however. changes the nature or the client a tax matter from a compliance issue to a legal issue.

[ILLUSTRATION OMITTED]

The best way to serve the client's interest is to resist the urge to investigate further and immediately refer the client to an experienced criminal tax attorney.

The AICPA Statement on Standards for Tax Services asserts that when the CPA has a reason to believe that a taxpayer may be charged with any type of fraud or criminal violation, the client should be advised to consult with a tax attorney before speaking to the CPA further in regard to the matter at hand.

Common Misunderstanding of Accountant-Client Privilege

Many CPAs mistakenly believe that their client communications are protected when representing an audited client. This is partially true in non-criminal tax matters especially where the CPA did not prepare the return under audit.

However, CPA communications surrounding the preparation of a client's original return that is under audit are never privileged even where the original return was prepared by an attorney given that a tax return is a public disclosure; therefore, no expectation of confidentiality surrounds the communications at issue.

A dilemma for CPAs instantly develops when a civil examination turns criminal and CPAs can find themselves legally compelled to divulge the client's previously discussed secrets to the IRS under its subpoena power. Moreover, a conflict of interest inevitably arises where an actual or potential criminal tax issue arises surrounding a previous tax preparation engagement where CPAs have a vested interest in protecting their reputation with the investigating tax authority, which Can place them at odds with the needs of the investigated client.

A taxpayer with a potential criminal matter requires both legal and accounting assistance to defend a case. Where the attorney deems it advantageous for the client, the attorney may engage the referring CPA. BY engaging the CPA's services under a Kovel letter prepared by an attorney, the CPA can freely communicate with the...