Can Accountants be Whistleblowers?

The accounting profession operates both to aid their clients and to bring the public accurate financial statements.   Accounting fraud has been at the center of some of the nation’s largest financial and business controversies.

 

After Enron and a number of other accounting scandals at the turn of the 21st Century, Congress passed the Sarbanes-Oxley Act to make it more difficult for public companies to fraudulently manipulate their financial statements.

 

In Lawson v. FMR LLC, Justice Ginsburg’s opinion extensively discusses the adoption of whistleblower protections by Congress in SOX to encourage accountants and lawyers to blow the whistle.

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Accountants can receive an award as a whistleblower under the IRS program. They do not have any special internal reporting requirements.   However, there are two restrictions on their ability to submit information and earn a reward. A whistleblower cannot submit information about a taxpayer and be the taxpayer’s representative in a pending administrative matter or in litigation where the IRS has an interest. The IRS will cease communications with the representative regarding the matter and inform the taxpayer that it needs to find a new representative. Once the individual is not representing the taxpayer in the matter, the IRS can take their information.   For those working in such a capacity but not currently representing the IRS, it is also worth noting that an individual who has provided information about a taxpayer in the past cannot represent them in a matter either. In other words, whistleblowing on a taxpayer is a bar to present and future representation of them in matters involving the IRS. The IRS will also not accept privileged material from the whistleblower. While there is no general federal accountant-client privilege, in some situations material from an accountant could be subject to the attorney-client privilege or the federal authorized tax practitioner’s privilege. Determining whether material is privileged requires an examination of the particular facts of a situation and isn’t easily translated into general advice about whether specific information will be privileged or not.

The attorney-client privilege applies when accountants are serving as members of the legal team. Typically, the accountant is hired by an attorney to aid them in providing legal services. This arrangement was approved in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961). Needless to say, this relationship is carefully scrutinized to determine whether the accountant is truly aiding the attorney in preparation for litigation (or otherwise providing legal advice), or simply trying to cloak an otherwise non-privileged relationship in the privilege. There may be instances where the material from the accountant is deemed not privileged despite work as part of a legal team. This may happen when the accountant has had a longstanding relationship with the client and they do not clearly separate the information that is privileged. It also may result from the accountant acting in more than one capacity, such as preparing an amended tax return after providing legal advice about the need for it. If the material is privileged, disclosure is only permitted if it is authorized by Sarbanes-Oxley § 205.3(d)(2), the state-attorney conduct rules, or otherwise permitted. § 240.21F-4(b)(4)(i).

Know The Rules

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The authorized tax practitioner’s privilege was established when Congress passed the Internal Revenue Service Restructuring and Reform Act of 1998. It extends confidentiality protections to communications between an accountant and a taxpayer because accountants can represent taxpayers before the IRS. The privilege is no broader than the attorney-client privilege and only applies in situations where the communication would have been protected if it was an attorney. There are significant limitations to this privilege, located in §7525. Tax return preparation is generally not considered protected advice. Section 7525 does not apply to criminal proceedings or cover state tax actions. There is also an exception for written communications promoting participation in tax shelters. The crime-fraud exception to privilege is also available, rendering consultations about the commission of a fraud or crime unprotected.

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