The investigative accountant and confidentiality in a criminal tax fraud investigation.by Vickers, Judson K.
The investigative accountant's discussions with the taxpayer and resultant work product must be protected against discovery by the government prosecutors. As in any litigation consulting engagement, the rules governing attorney-client privilege govern. What if the investigative accountant also provides other services to the taxpayer?
During a criminal tax fraud investigation, the attorney for the taxpayer who is a subject or target of the investigation will usually find it necessary to retain an investigative accountant. Expert accounting assistance may be essential at both the initial stages of the investigation, as well as during any subsequent criminal proceedings.
The goal of the investigative accountant during the initial stage of an investigation is to keep pace with, or preferably ahead of, the government's investigation. The accountant can assist the attorney in highlighting potential relevant issues, identifying defenses the taxpayer might have, and analyzing and explaining the taxpayer's documents.
Preserving the confidentiality of both the taxpayer's statements to the accountant and the accountant's work product during this period is critical. Although it should be the attorney's responsibility to ensure that confidentiality is maintained, the investigative accountant should be aware of the extent of the available privileges to avoid inadvertently compromising the taxpayer's case. In addition, the taxpayer's regular accountant should be aware of these problems as well. If the regular accountant is consulted by someone who believes that he or she is the subject or target of a tax investigation, this accountant should be able to explain the implications of further communication in addition to insisting that the taxpayer retain an attorney.
The issues are not merely academic. Tax investigators and prosecutors appreciate that a taxpayer's accountant can be an important source of information, whether through the accountant's testimony or work product. Typically, they will attempt to interview or subpoena the accountant at the outset of the investigation.
Moreover, an accountant's testimony is not limited to state and Federal criminal tax proceedings. A taxpayer may be named in a civil action commenced by the government for the collection of taxes and penalties. Conceivably, the taxpayer could also be sued by private litigants in a commercial or matrimonial action concerning the taxpayer's financial affairs. Or, the taxpayer may be prosecuted for other state and Federal crimes. Again, the accountant's testimony and documents may be sought in these actions.
It is important to understand the privileges surrounding the attorney- accountant-client relationship that exist under both Federal and state law to assist the accountant (whether retained for the taxpayer's day- to-day accounting needs or specially retained for a criminal tax investigation) in recognizing situations where the confidentiality of the taxpayer's communications and information could be compromised.
It should be made clear at the outset that no accountant-client privilege or accountant work product protection exists under either Federal or New York law. However, the accountant's work product and the taxpayer's communications to him or her may be protected by the attorney-client privilege and the attorney work-product doctrine.
The attorney-client privilege generally protects from disclosure the client's confidential communications to his or her attorney made for the purpose of securing legal advice. The privilege extends to communications to an attorney's agents, including accountants. Furthermore, the privilege can be (and should be) invoked at all stages of the criminal tax investigation, including in response to an IRS summons or a grand jury subpoena.
Accordingly, as long as communications between the taxpayer and the investigative accountant meet the elements of the attorney-client privilege and the privilege is not subsequently waived, such communications remain protected from disclosure to the government.
The Attorney Work-Product Doctrine
Although, as noted, there is no accountant work-product protection under Federal law, the work-product of an accountant can be protected by the attorney work-product doctrine. This privilege protects from disclosure the work product of an attorney, whether it is based on a confidential communication from the client, that is prepared in anticipation of litigation. Materials prepared during a criminal tax investigation will meet this standard in most instances.
Similar to the attorney-client privilege, the work-product doctrine also extends to the accountant who is assisting the attorney. Therefore, the work product of an accountant prepared during a criminal tax investigation at the direction of counsel should not be disclosable pursuant to an IRS summons, grand jury subpoena, or trial subpoena. However, unlike the attorney-client privilege, the work-product doctrine is qualified. Although unlikely, it is possible that the government can obtain accountant work product if it establishes sufficient cause for the production of the materials.
In theory, the two privileges above seem easy enough to follow. As illustrated by the large number of cases holding that the privileges were either not established or not maintained, however, these relatively simple rules are not always so easy to implement in practice. In addition, an abundance of caution is especially important because the party invoking the privilege has the burden of establishing it, and the attorney-client privilege is often narrowly construed by the courts.
RETAINING THE INVESTIGATIVE ACCOUNTANT
Once the decision to retain an accountant to assist in the investigation is made, the natural tendency of the attorney or the taxpayer might be to look to the taxpayer's regular accountant because of his familiarity with the taxpayer's finances. There are two reasons why such a selection would be unwise. First, selecting this accountant to assist the attorney may create a conflict of interest if the taxpayer defends on the ground that he or she relied on the advice given by the accountant, or if the client later claims that the accountant committed professional malpractice.
Second, and more pertinent to the discussion, selecting the regular accountant to assist the attorney creates a substantial risk that privileges usually enjoyed by the taxpayer will be lost.
Strictly speaking, there is no rule that the accountant's role as tax preparer or financial advisor on one occasion automatically defeats any privileges that might be available while he or she is acting in the capacity of the attorney's investigative agent on another. However, a court which ultimately must decide whether any privileges are applicable might find the distinction difficult to draw. The court could mistakenly conclude that a particular accountant-taxpayer communication was for the purpose of seeking the accountant's advice rather than the attorney's advice, or that the taxpayer intended the information to be disclosed on a tax return pursuant to the accountant's role as tax return preparer. Either of these findings by the court will eliminate the protection afforded by the attorney-client privilege. Similarly, a court could mistakenly conclude that certain work papers were prepared by the accountant for nonlitigation purposes, which precludes application of the attorney work-product doctrine. Furthermore, the accountant might have a difficult time juggling the two roles and forget which communications from the taxpayer were made for what purpose. This difficulty could prove fatal to the taxpayer's case if the accountant testifies before a grand jury or at trial.
Where two accountants are used, it is easier to distinguish which communications and work papers were for what purpose, and the investigative accountant and the attorney will be in a better position to demonstrate successfully that the attorney-client and work-product protections should be maintained.
Of course, the attorney should be aware of the danger of retaining the taxpayer's regular accountant to also act as the investigative accountant. However, the responsibility of informing the taxpayer of the danger of asking the accountant to wear both hats may fall upon the accountant in the first instance, since the taxpayer might first seek the accountant's advice before retaining an attorney.
If for some unusual circumstances, the accountant is in the position of being both the taxpayer's regular accountant and the investigative accountant, he or she should keep all documents received from the taxpayer in his or her capacity as the investigative accountant and all work papers prepared pursuant to the investigation separate from the taxpayer's regular file. If feasible, the accountant also should not communicate with the taxpayer without the attorney being present. Finally, if the accountant works for an accounting firm, he or she should explore the possibility of getting another accountant in the firm to handle the investigation. A "Chinese Wall" could then be erected between the regular accountant and the investigative accountant and their respective files. However, it is emphasized that no court has expressly approved of such prophylactic measures, and courts have been reluctant to find such "screening" effective in other contexts, such as where an attorney for one party during a litigation joins the opposition's law firm.
A Written Retainer Agreement
Regardless of who is ultimately chosen to assist the attorney in the investigation of the taxpayer's case, the attorney should be the party that retains the investigative accountant using a written retainer agreement. If the role of the accountant is subsequently challenged, the attorney will then have a document that clearly memorializes the nature of the relationship between attorney and the accountant.
The retainer agreement should include statements to the effect that 1) the accountant was retained for the purpose of assisting the attorney in connection with the rendition of legal services to the taxpayer; 2) the accountant was retained in anticipation of litigation; 3) all communications between the taxpayer and the accountant or the attorney and the accountant are confidential and are made solely for the purpose of enabling the attorney to render legal advice to the taxpayer; 4) the accountant will not disclose any information to a third party without the attorney's express consent; and 5) the accountant's work papers are held by the accountant solely for the attorney's convenience and must be turned over to the attorney at the attorney's request.
THE ATTORNEY-ACCOUNTANT-CLIENT RELATIONSHIP
Even if the investigative accountant is retained by the attorney and is not the taxpayer's regular accountant, there is still ample opportunity to lose otherwise applicable privileges. Just because the accountant is retained by the attorney does not mean the privileges will automatically apply. Instead, the accountant's work product and the accountant- taxpayer discussion must be traceable to the attorney's instructions. The accountant-taxpayer discussions must be made at the direction of the attorney for the attorney-client privilege to apply, and the accountant must be acting as the attorney's agent for the work-product doctrine to apply.
This rule, as it relates to accountant-taxpayer communications, is usually adhered to easily if the attorney is present when the discussions take place. However, even though it is advisable for the attorney to be present during accountant-taxpayer communications, this may not always be feasible. It is certainly not a prerequisite to attorney-client privilege protection for counsel to be present as long as the accountant is acting as the attorney's agent. The responsibility may therefore fall upon the accountant to ensure that the privilege is not violated. The accountant should inform the taxpayer that their discussions are for the purpose of the accountant assisting the attorney in rendering legal advice. The taxpayer should not ask the investigative accountant for either financial or legal advice, since communications made for the purpose of seeking the accountant's financial, accounting, or legal advice, even when the accountant is working under the direction of an attorney, are not privileged. The taxpayer should be told to direct any legal questions to the attorney, and that any communications concerning business or financial advice are not privileged, even if the advice is rendered by or in the presence of an attorney. If the taxpayer must communicate with the regular accountant during the investigation, the taxpayer should be told to consult with the attorney initially for advice as to what the taxpayer should and should not disclose to the accountant.
With respect to the accountant's work-product, the investigative accountant should only act pursuant to the attorney's instructions. Any information the accountant obtains from third parties will not be protected by the attorney-client privilege. However, when such information is gathered by the accountant at the direction of the attorney, it may be protected by the attorney work-product doctrine.
In addition to discussing the pertinent facts of the case with the taxpayer, the investigative accountant also should review taxpayer documents, some of which may be subject to the attorney-client privilege. These documents do not enjoy privileged status simply because they were transmitted to the accountant from the attorney or the taxpayer. Rather, confidentiality must be maintained.
These records should always be kept separate from any other documents the accountant has in his or her possession, and no one should be permitted to have access to them other than the accountant or the attorney. Furthermore, access should be limited to staff members who are essential to furthering the accountant's assistance to the attorney because the extent to which the investigative accountant's staff members are within the privilege is not certain.
AFTER THE INVESTIGATION
Once the investigative accountant's work for the attorney has ended, the accountant should turn over to the attorney all work-product and all taxpayer documents. Retention of these documents creates two areas of vulnerability. First, continued possession of the documents by the accountant creates a risk that an unauthorized person may gain access to them, thereby undermining their privileged status. Second, the continued retention of the taxpayer's documents is ill-advised in the event the accountant is later retained to perform other work for the taxpayer unrelated to the prior investigation, since use of once-privileged documents for a nonlegal purpose waives the attorney-client privilege.
Similarly, the investigative accountant should not communicate with the taxpayer after the attorney's work is completed. Once the attorney has completed the performance of his or her legal services, subsequent accountant-taxpayer communications necessarily cannot be in furtherance of securing legal advice and, accordingly, will not be covered by the attorney-client privilege. At the very least, the accountant should advise the taxpayer that communications to the accountant are no longer privileged.
As a final note, when the case comes to trial, the attorney may wish to retain another accountant who will serve as a testifying expert to assist the jury in understanding the taxpayer's theory of the case. Ideally, the investigative accountant should not serve as an expert witness at trial. When individuals are called as expert witnesses, parties have a variety of disclosure obligations in both civil and criminal cases. These obligations are not diminished by the attorney- client privilege or work-product doctrine. Furthermore, there is no guarantee that a litigant can continue to maintain these privileges if he uses an investigative accountant as the testifying expert witness. For example, if the investigative accountant is called as the expert accounting witness during a criminal trial, the report prepared for the attorney is subject to disclosure and the government may inquire into the basis of the accountant's expert opinion. Accordingly, if the taxpayer's litigation budget permits, the best way to proceed is to retain both a consulting expert and a testifying expert.
ERR ON THE SIDE OF CAUTION
In conclusion, the investigative accountant should keep in mind two key points that generally encompass the principles set forth above: 1) treat all taxpayer communications and documents as confidential (that is, no one but the attorney, investigative accountant, and necessary staff members may see, hear, or have access to them) and 2) when in doubt about the scope of his or her work, check with the attorney. Cases involving the attorney-client privilege and work-product doctrine are invariably fact sensitive, and the accountant should always err on the side of caution.
Indeed, the investigative accountant should check with the attorney on a regular basis, even if he or she fully comprehends the initial instructions received as to the nature of his or her assignments. Many of the specific points addressed above can be embodied in the accountant's retainer agreement, which could help in meeting the burden of demonstrating the attorney-client privilege or attorney work-product doctrine at a later date. Merely reciting these principles in a retainer agreement is not enough. Instead, these principles must be adhered to as well for there to be less risk of the accountant inadvertently compromising the taxpayer's case.
Alan A. Schachter, CPA, CFE is a shareholder of Urbach Kahn & Werlin, P.C. He is in charge of the firm's litigation support practice. He has had extensive experience as an investigative accountant as well as a testifying expert for the defense in major white collar criminal cases. Mr. Schachter has written and lectured extensively on these matters.
Lawrence J. Zweifach, Esq. is a partner in Gordon Altman Butowsky Weitzen Shalov & Wein, representing institutions and individuals in white-collar criminal and regulatory matters. He is a former Chief of the Criminal Division of the U.S. Attorney's Office for the Eastern District of New York.
Judson K. Vickers, Esq. is an associate in the Gordon Altman Butowsky firm and is a former law clerk to a U.S District Judge for the eastern District of New York.
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