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Home > Blog > CPAs: How to Protect Yourself If You Suspect Your Client is Under Criminal Investigation

CPAs: How to Protect Yourself If You Suspect Your Client is Under Criminal Investigation

December 12, 2018

CPAs: How to Protect Yourself If You Suspect Your Client is Under Criminal Investigation

When it comes to financial matters, certified public accountants (CPAs) cannot use ignorance as a defense if their clients’ tax returns are later investigated.

This is especially true if those financial matters involve legal issues — as they do if your client happens to engage in fraudulent or criminal activity. While you may wish ignorance were an option, it’s always better to prepare for these circumstances by doing proper due diligence when the return is prepared and understanding how to respond if a criminal investigation is opened after the return is filed.

It’s important to understand that, unlike the attorney-client privilege, there is no accountant-client privilege. That means if your client is under investigation for tax fraud or other criminal activity, then as their CPA, you could be subpoenaed as a witness and forced to share evidence or testify about matters discussed with your client.

Balancing your obligations to your client with legal responsibilities can result in complicated scenarios, but that doesn’t mean you’re out of options. Here are a few ways to mitigate and prepare for dealing with clients under criminal investigation.

What Should You Do?

When faced with the news that your client is undergoing a criminal investigation, don’t panic. There a few things you can and should do, and some things you definitely shouldn’t do.

Dos

  • Establish Strong Record Keeping

The best way to minimize these legal issues before they start is by keeping detailed records. Ask your clients for hard copies, receipts, or third party verification of the items they’re claiming and reporting on their tax return. Make sure there’s a clear paper trail to support the details of transactions and questionable items (that are not ordinary items, such as large net operating losses and other items that offset income) that you are aware of as their CPA.

  • Explain the Tax Laws and Rules to Your Client

As a CPA, it’s your responsibility to inform your client of relevant tax laws and rules when reviewing your client’s accounting records and reporting transactions. Make sure you update them frequently and thoroughly, especially if you’re worried they may be veering into areas not clearly defined by tax laws and regulations. It’s better to give too much information than too little.  If your client’s situation involves legal issues that are not clearly defined by tax law, consult with a tax attorney before the return is prepared or when you discover that a criminal investigation may have commenced.

  • Cease Representation During an Investigation

Most CPAs aren’t qualified to represent their clients during a criminal investigation. Often, the best solution is to stop representing them to avoid becoming further embroiled in the case yourself.

  • Refer Your Client to a Tax Attorney

Protecting yourself and your business doesn’t mean you have to leave your client out in the cold — familiarize yourself with legal tax experts in your area, so you can refer your clients to them for help if they are being investigated. Maintaining a good relationship with a trusted tax attorney allows you to smoothly extricate yourself from a client’s legal situation when necessary, while putting your client in the hands of someone who can provide legal guidance where communication is protected by the attorney-client relationship.

Don’ts

  • Don’t Put Your Client Above the Law and Public Good

Don’t forget your legal responsibilities are both to your client and the government (to accurately and fairly report items on a tax return) (See Circular 230). While it is important to offer clients qualified and accurate tax advice, your advice does not extend to assisting clients with questionable items that may later be deemed fraudulent or illegal. If you are concerned about a client’s request to report items on their tax return, consult a tax attorney who may be able to provide legal guidance to clarify the risks and benefits of reporting a transaction on a return.

  • Don’t Trust Clients Implicitly

While you may trust clients you’ve been serving for several years, don’t assume all clients will be straightforward and provide all relevant information. Maintain a healthy level of suspicion. If your client has jumped from accountant to accountant, has unexplained sources of income, or other suspicious transactions, trust your gut.

  • Don’t Practice — or Appear to Practice — Law

It is your duty to inform your client of relevant rules or laws during your professional relationship with them, but once they’re under investigation, it’s critical not to provide any advice that could be construed as practicing law. The distinction between an accountant and an attorney must be maintained.

  • Don’t Keep Information from Investigators

Finally, if you or your client is subpoenaed to be a witness or summoned to give up evidence, cooperate with investigators. Withholding evidence in this context is usually against the law. A tax attorney can review the subpoena or summons and determine if a privilege can be raised regarding the information or testimony demanded. If you want to learn more about the details related to this process, reach out to a tax attorney for professional guidance.

What Could Happen If My Client is Under Criminal Investigation?

Sometimes it’s impossible to catch everything and mistakes happen. If one of your clients goes to court relating to transactions characterized as tax fraud or other criminal activity, know that you may be called on as a witness and compelled to share evidence you have.

If one of your clients is under criminal investigation and you want to be certain you’re protecting yourself, don’t wait until it’s too late. Reach out to an experienced tax attorney who can help you navigate through these legal tax matters. At Milikowsky Tax Law, we have more than a decade of business, legal, and tax experience. Our experienced tax lawyers can help with everything from IRS and State of California civil audits to criminal investigations. Our strong relationships with reliable CPAs in California allow us to better serve our clients and support our fellow tax professionals to minimize civil and criminal tax risks.

Contact Milikowsky Tax Law today and speak to our experts about how you can protect yourself and your business if you suspect or discover that your client is under criminal investigation.

Filed Under: Blog, CPA Tagged With: CPA, Criminal Investigation

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