When Can a CPA Report You to the IRS?

A Certified Public Accountant (CPA) is entrusted with sensitive financial information, forming a relationship built on trust and discretion. Clients often wonder about the boundaries of this confidentiality, particularly concerning potential disclosures to the Internal Revenue Service (IRS). This article explores the professional obligations governing CPAs and the specific circumstances under which client information may be disclosed.

The Foundation of CPA Confidentiality

Certified Public Accountants operate under ethical guidelines that prioritize the protection of client information. Confidentiality is a core principle, embedded in professional codes of conduct and rules set by state boards of accountancy. These standards establish a clear ethical duty for CPAs to safeguard client data.

A CPA generally does not disclose client information without explicit permission. This ethical obligation helps foster an environment where clients feel comfortable sharing comprehensive financial details. While this duty of confidentiality is broad, it is distinct from legal privilege, meaning a CPA may be compelled to disclose information despite their ethical commitment.

Mandatory Disclosures by CPAs

While CPAs maintain an ethical duty of confidentiality, legal and professional obligations can compel them to disclose client information. These are instances where a CPA must provide data, often overriding the general confidentiality rule.

One common scenario involves legally valid IRS summonses or court orders. If the IRS issues a summons for client records or testimony, a CPA is legally required to comply. Failure to comply can result in enforcement actions. CPAs must also comply with other court orders or subpoenas issued in legal proceedings, which can compel the production of client financial information.

Regarding illegal acts or fraud, a CPA generally does not have a proactive legal obligation to report client tax fraud directly to the IRS. Their primary professional responsibility is to advise the client to correct any material misstatements or fraudulent activities. If the client insists on engaging in illegal or fraudulent conduct, the CPA’s ethical course of action is to withdraw from the engagement. This distinction is important; a CPA is not an informant for the IRS unless legally compelled through mechanisms like a summons or court order.

Statutory requirements may also necessitate disclosure. Some anti-money laundering regulations impose obligations on CPAs when they are involved in specific financial transactions or act in capacities that trigger reporting requirements. These obligations generally involve monitoring and reporting certain activities if the CPA firm itself is engaged in specific financial services.

Permitted Disclosures by CPAs

Beyond mandatory disclosures, a CPA is permitted to disclose client information in specific circumstances, even without a direct legal order. These situations represent exceptions to the general rule of confidentiality.

A CPA can share confidential data if the client provides explicit consent. This permission is often in writing and specifies what information can be shared, with whom, and for what purpose.

CPAs also disclose client information during professional peer reviews and quality control processes. These reviews are standard practices within the accounting profession, designed to assess a firm’s adherence to professional standards. Information obtained during a peer review is confidential to the review process itself and is not publicly disclosed, although some peer review results may be shared with state accountancy boards.

If a CPA faces a lawsuit initiated by a client, such as a malpractice claim, they are permitted to disclose relevant client information to defend themselves. Disclosures may also be required during investigations conducted by state boards of accountancy or professional ethics committees.

If a client insists on presenting fraudulent information or engaging in illegal acts, a CPA’s ethical obligation leads to withdrawing from the engagement. This is a permitted professional response to maintain integrity and avoid association with illicit activities.

Distinction from Attorney-Client Privilege

The confidentiality between a CPA and their client is often confused with attorney-client privilege. While CPAs are bound by ethical confidentiality, this is not the same as a legal privilege that prevents compelled disclosure.

Attorney-client privilege is a legal protection that shields confidential communications between an attorney and their client. These communications are made for the purpose of seeking or rendering legal advice and are protected from compelled disclosure in legal proceedings.

A CPA’s ethical duty of confidentiality does not automatically create a legal privilege against compelled disclosure. If a CPA receives an IRS summons or a court order, they cannot refuse to provide client information by claiming an accountant-client privilege. Unlike an attorney, a CPA may be forced to disclose client information in response to a valid legal demand.

However, a limited federal tax practitioner privilege exists under Internal Revenue Code Section 7525. This provision extends a privilege similar to attorney-client privilege to communications between a taxpayer and a federally authorized tax practitioner, including CPAs, regarding tax advice. It applies only to non-criminal tax matters before the IRS or in federal court proceedings. This privilege has limitations; it does not apply to communications related to tax return preparation or advice concerning corporate tax shelters. It also does not apply to criminal tax matters or proceedings outside of federal tax matters.