111/4142 MCQ 1D2 PRIVILEGED COMM Flashcards
A CPA is permitted to disclose confidential client information without the consent of the client to:
I. another CPA who has purchased the CPA’s tax practice.
II. another CPA firm if the information concerns suspected tax return irregularities.
III. a state CPA society voluntary quality control review board.
I and III only
II and III only
II only
III only
III only
A CPA is permitted to disclose confidential client information to a state CPA society voluntary quality control review board. A CPA is not permitted to disclose confidential client information to another CPA who had purchased the CPA’s tax practice without the consent of the client. The CPA must obtain the client’s permission before consulting another CPA firm with respect to a client’s tax return
A CPA’s working papers:
need not be disclosed under a federal court subpoena.
must be disclosed under an IRS administrative subpoena.
must be disclosed to another accountant purchasing the CPA’s practice even if the client hasn’t given permission.
need not be disclosed to a state CPA society quality review team.
WATCH OUT. I ANSWERED TOO QUICKLY AGAIN.
must be disclosed under an IRS administrative subpoena.
An IRS administrative subpoena has judicial or quasi-judicial force and may require a CPA to disclose working papers. A federal court subpoena or a request from a state agency or CPA society quality review team likewise forces disclosure. The client must give permission to reveal working papers to another CPA (see ET 1.700.001, “Confidential Client Information Rule”).
Authorities
ET 1.700.001
A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her tax return as married filing separately and asked the CPA not to disclose the information to anyone. The CPA was not retained by the husband for any tax work. The husband believed that his wife’s tax return was negligently prepared and that he was financially harmed. He hired an attorney, without his wife’s consent, to pursue a negligence claim against the CPA. The CPA hired an attorney to defend against the negligence claim. To which party, if any, may the CPA disclose the wife’s tax return information without the wife’s consent?
The husband, for the evaluation of the negligence claim
The CPA’s attorney, for the evaluation of the negligence claim
The husband’s attorney, for the evaluation of the negligence claim
No one, because all disclosures must be made with the wife’s consent
The CPA’s attorney, for the evaluation of the negligence claim
Under IRC Section 7525, a privilege is available for communication between a federally authorized tax practitioner (e.g., a CPA, attorney, enrolled agent, or enrolled actuary) and a client or potential client under certain circumstances. The attorney-client privilege can be waived if the third party is under an obligation of confidentiality (e.g., the CPA’s attorney).
The AICPA Code of Professional Conduct allows a CPA to disclose confidential client information only pursuant to a subpoena (court order), or applicable laws or government regulations; AICPA or state CPA society or board of accountancy authorization; or inquiry made by a recognized investigatory or disciplinary body.
Additionally, tax return preparers within the same firm in the United States may, without taxpayer consent, use or disclose information within the firm to assist in the preparation of, or provide auxiliary services in connection with, return preparation.
CHATGPT4: In situations involving confidentiality and professional ethics, a CPA is bound by both legal and professional standards regarding client confidentiality. According to the AICPA (American Institute of Certified Public Accountants) Code of Professional Conduct, a CPA must maintain the confidentiality of client information and cannot disclose this information without the client’s consent, except for specific, legally permissible exceptions.
One such exception is when the CPA needs to disclose the information for the purpose of obtaining legal advice or in defense of a legal dispute or proceeding. This means that the CPA can disclose the wife’s tax return information to their own attorney in the context of evaluating and defending against a negligence claim. This is considered a necessary and permissible disclosure because the CPA must be able to consult with legal counsel to properly defend against the allegations of negligence. The disclosure is limited to the extent necessary for the attorney to provide legal advice or defense services.
Therefore, the party to whom the CPA may disclose the wife’s tax return information without her consent, under these circumstances, is:
The CPA’s attorney, for the evaluation of the negligence claim.
This disclosure is strictly for the purpose of seeking legal advice or defense and is not intended for broader dissemination. It is a recognized exception to the rule of client confidentiality that allows professionals to defend themselves while still respecting the privacy and confidentiality of client information.
At a confidential meeting, an audit client informed a CPA about the client’s illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to the meeting between the CPA and the client. After receiving immunity, the CPA should do which of the following?
Take the Fifth Amendment and not discuss the meeting.
Discuss the entire conversation, including the illegal acts.
Cite the privileged communications aspect of being a CPA.
Discuss only the items that have a direct connection to those items the CPA worked on for the client in the past.
Discuss the entire conversation, including the illegal acts.
Although the CPA has a confidential fiduciary relationship with the client, under common law there is no privilege that an accountant or client may invoke to prevent disclosures. Under a subpoena, the CPA would be required to disclose information regarding the conversation. Compliance with a court summons, a subpoena, laws, or government regulations would be an exception to the Confidential Client Information Rule (ET 1.700.001).
The suggestion to receive immunity is simply good legal advice since there are very few limits on what a prosecutor in a criminal trial might do while seeking to convict a criminal defendant.
Authorities
ET 1.700.001
Hayden Corporation’s CEO, John Jones, has asked you to analyze and advise the company about the possible benefit of a newly available tax accounting method for development costs. Use of the method will require a change in method of accounting, with adjustments to income over several years. John has a degree in marketing and has little patience for complex explanations of tax law. Which of the following professional standards apply to your response to John’s request?
General Standards for Accounting Services
Statement on Standards for Tax Services (SSTS) 7
Treasury Circular 230, Section 10.37
New York Times Manual of Style and Usage
II and IV
I and II
I and III
II and III
II and III
Paragraph 10.37 of Circular 230 requires written advice to satisfy four reasonable standards, relate the law to the facts, and not consider the likelihood of an audit. SSTS 7 suggests that the form of tax advice should consider the specific or general nature of the inquiry, the technical complexity involved, and the tax sophistication of the taxpayer.
With guidance from both those sources, the CPA in this situation should probably prepare a written response to the CEO’s request.
Authorities
SSTS 7
Treasury Circular 230, 10.37
In addition to citing the tax law to which it refers, a tax communication should include all of the following except:
one complete conclusion for all of the issues.
a brief summary of the facts.
a reasoning for the tax conclusion reached.
each tax issue considered.
A tax communication should include:
a brief statement of the facts,
each tax issue considered,
a separate conclusion for each tax issue, and
where the conclusions came from, e.g., the authority.
Mell Corp. engaged Davis & Co., CPAs, to audit Mell’s financial statements. Mell’s management informed Davis it suspected that the accounts receivable were materially overstated. Although the financial statements did include a materially overstated accounts receivable balance, Davis issued an unmodified opinion. Mell relied on the financial statements in deciding to obtain a loan from County Bank to expand its operations. County relied on the financial statements in making the loan to Mell. As a result of the overstated accounts receivable balance, Mell has defaulted on the loan and has incurred a substantial loss.
If County sues Davis for fraud, must Davis furnish County with the audit working papers?
Yes, if the working papers are lawfully subpoenaed into court
Yes, provided that Mell does not object
No, because of the privileged communication rule, which is recognized in a majority of jurisdictions
No, because County was not in privity of contract with Davis
Yes, if the working papers are lawfully subpoenaed into court
If County sues Davis for fraud, they will likely subpoena the audit working papers as evidence that Davis knew accounts receivable were materially overstated.
Audit working papers may be subpoenaed and are not protected as privileged communication.
Page, CPA, has T Corp. and W Corp. as audit clients. T Corp. is a significant supplier of raw materials to W Corp. Page also prepares individual tax returns for Time, the owner of T Corp., and West, the owner of W Corp. When preparing West’s return, Page finds information that raises going concern issues with respect to W Corp. May Page disclose this information to Time?
No, because the information should only be disclosed in Page’s audit report on W Corp.’s financial statements
Yes, because there is no accountant-client privilege between Page and West
No, because the information is confidential and may not be disclosed without West’s consent
Yes, because Page has a fiduciary relationship with Time
No, because the information is confidential and may not be disclosed without West’s consent
The going concern issue is special knowledge obtained on an engagement, and this knowledge is protected by the Confidential Client Information Rule (ET 1.700.001). This knowledge may not be used on an engagement for T Corp. unless it can be used without violating the confidence of West or if the CPA obtains the permission of West to disclose the information.
Authorities
ET 1.700.001
To which of the following parties may a CPA partnership provide its working papers without either the client’s consent or a lawful subpoena?
The IRS: Yes; The FASB: Yes
The IRS: Yes; The FASB: No
The IRS: No; The FASB: Yes
The IRS: No; The FASB: No
The IRS: No; The FASB: No
Generally, clients must be asked whether their materials can be released to other parties. Here, however, the question’s proper answer hinges on other matters.
Though the FASB is a governing board for accounting standards, it has neither the inherent ability nor the power to require CPAs to provide copies of working papers to the board. It is not a licensing (or regulatory) board, such as a state board of public accountancy.
The IRS has tremendous and broad administrative powers, particularly in criminal matters, yet it must still follow the law and follow due process procedures. The key to understanding this part of the question is the lack of a lawful subpoena being noted as having been issued. Once a subpoena has been issued, compliance will be necessary. Notice, however, that a third party, the judiciary, has independently reviewed the IRS’s materials and determined that probable cause or other appropriate justification is present to issue the subpoena. Unlike an attorney, a CPA does not have absolute privilege, although tax workpapers have some limited privilege. It is not clear here whether such requested records are tax or other working papers.
To which of the following parties may a CPA partnership provide its working papers, without being lawfully subpoenaed or without the client’s consent?
Any surviving partner(s) on the death of a partner
The FASB
The IRS
A CPA before purchasing a partnership interest in the firm
Any surviving partner(s) on the death of a partner
Without a subpoena or client consent, a CPA partnership may provide its working papers only to surviving partners on the death of a partner or under a review of the CPA’s professional practice under AICPA or State CPA Society or Board of Accountancy authorization. In most other cases, including the IRS and a CPA purchasing a partnership interest in the firm, a subpoena or the client’s consent is required.
The FASB should have no reason to need access to a practitioner’s working papers.
Authorities
ET 1.700
Thorp, CPA, was engaged to audit Ivor Co.’s financial statements. During the audit, Thorp discovered that Ivor’s inventory contained stolen goods. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial. Ivor claimed accountant-client privilege to prevent Thorp from testifying.
Which of the following statements is correct regarding Ivor’s claim?
The accountant-client privilege can be claimed only in civil suits.
The accountant-client privilege can be claimed only to limit testimony to audit subject matter.
Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege.
Ivor can claim an accountant-client privilege only in federal courts.
Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a privilege.
The “accountant-client” privilege does not generally exist, although some states have adopted statutes providing for such a privilege. The client in this case could successfully claim the accountant-client privilege only in those states that have adopted a statute creating such a privilege. The privilege does not apply in federal court or federal administrative agencies. While a limited privilege exists in a noncriminal tax matter, this fact situation does not allow a consideration of that very limited privilege.
*Some states provide that the privilege is not applicable to criminal or bankruptcy actions. This is why I chose “The accountant-client privilege can be claimed only in civil suits” as an answer. However, that answer makes it sound like that is the case in all states, so I did doubt my answer.
Tax communications to an IRS agent should:
only address the tax accountant.
be much less detailed than communications with the taxpayer.
include the IRS agent’s name.
be much more precise than communications with the taxpayer.
be much more precise than communications with the taxpayer
Because the agent is expected to be more knowledgeable about tax issues (Statement on Standards for Tax Services (SSTS) 7.7(f)), communication to an IRS agent should be much more detailed than to a taxpayer. The communication should include details of why the position is being held and any other material to make the issue understandable.
Authorities
SSTS 7
Under the Internal Revenue Code, a CPA who was engaged in the business of preparing tax returns could incur a penalty for disclosing taxpayer information without the taxpayer’s formal consent in which of the following circumstances?
The information was disclosed in the client’s state and local tax returns that the CPA prepared.
The information was disclosed in the client’s electronically filed tax return.
The information was disclosed pursuant to an attorney’s solicitation request.
The information was disclosed pursuant to a court order.
The information was disclosed pursuant to an attorney’s solicitation request.
“The information was disclosed pursuant to an attorney’s solicitation request” is correct. This is an example of incompetent or disreputable conduct; in essence, to willfully disclose or otherwise use a tax return or tax return information in a manner not authorized by the Internal Revenue Code, contrary to the order of a court of competent jurisdiction, or contrary to the order of an administrative law judge in a proceeding instituted under Treasury Circular 230, Section 10.60, without the taxpayer’s formal consent. Disclosing taxpayer information to a nonauthorized individual, such as an attorney, is an example of such a violation of this standard. The IRS may censure, suspend, or disbar any practitioner who is shown to be incompetent or disreputable.
The remaining answer choices (state and local tax returns, electronically filed tax return, and pursuant to a court order) are incorrect. Tax preparers could not fulfill their professional responsibilities if they were unable to exchange information with state and local government officials, the IRS, or the court system.
Authorities
Treasury Circular 230, 10.51(15)
Treasury Circular 230, 10.60
Which of the following is correct regarding an accountant’s workpapers?
The accountant owns the workpapers and generally may disclose them as the accountant sees fit.
The client owns the workpapers, but the accountant has custody of them until the accountant’s bill is paid in full.
The accountant owns the workpapers but generally may not disclose them without the client’s consent or a court order.
The client owns the workpapers but, in the absence of the accountant’s consent, may not disclose them without a court order.
The accountant owns the workpapers but generally may not disclose them without the client’s consent or a court order.
Workpapers have always been considered the property of the accountant under the common law as a work product. The content of the workpapers, however, contains sensitive and unique information of the client. As such, a question such as this is probing to determine if you recognize the fact that the client has the right to maintain “privacy” of such information and must be contacted to release the records, subject to a valid court order.
This is the correct answer in that it reflects the proper elements—the accountant “owns” the workpapers but must not disclose their contents except with permission of the client or under valid court order or both.
Which of the following statements is (are) correct regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm?
I. A CPA leaving a firm may take copies of information contained in client files to assist another firm in serving that client.
II. A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical expertise.
A I only
B II only
C Both I and II
D Neither I nor II
Neither I nor II
It should be recalled that the client files are generally the property of the CPA firm (work product) and also that of the client.
The appropriating CPA has no right or privilege to extract the information for the CPA’s or some other firm’s use, be it for technical expertise or other reasons. The CPA does not own this information, and what the CPA has done is theft of information, most of which is protected by privacy expectations of the client.
While it may be altruistic to think that the use of certain information would be used to “gain technical expertise,” it again is a matter of fact that the information obtained is not the removing CPA’s property—it is the CPA firm’s and the client’s, and the CPA has no right or privilege to extract such information without permission of the owners.
Ownership of an accountants working papers rests with the accountant, not with the accountants employees.
Here’s why:
I. Taking client files to assist another firm: This is a strict violation of confidentiality and professional ethics. Client information belongs to the firm, not the individual CPA, and unauthorized removal constitutes a breach of trust and potentially illegal activity.
II. Taking files for technical expertise: While gaining knowledge is valuable, copying client files for personal learning is inappropriate. The CPA should rely on permitted training materials and resources provided by the firm or professional organizations.
Therefore, neither reason justifies taking client file copies. Both options infringe on client confidentiality and violate professional standards.
When a CPA leaves a firm, they are generally not allowed to take copies of information contained in client files, regardless of the reason. This is because client files are confidential and are the property of the CPA firm, not the individual CPA. The information within these files is protected by both ethical standards and legal regulations regarding confidentiality and privacy.
Regarding Statement I: A CPA cannot take client files to assist another firm in serving that client, as this would breach confidentiality agreements and ethical standards set by the accounting profession. If the client decides to move their business to the CPA’s new firm, the proper and ethical course of action would be for the new firm to request those files directly from the original firm, with the client’s consent.
Regarding Statement II: Similarly, a CPA cannot take client files as a method of gaining technical expertise. The use of confidential client information for personal gain or for any purpose other than serving the client while at the firm is unethical and often illegal.
In both scenarios, the actions would violate the principles of confidentiality and integrity that are central to the accounting profession. CPA professionals are bound by a code of ethics that includes maintaining the confidentiality and privacy of client information.
