Grand Jury Subpoena to an Accountant: Is the Information Privileged?

A federal grand jury can subpoena an accountant and demand financial records, tax information, correspondence, work papers, and potentially testimony concerning a client.

That can pose a serious problem for someone already under federal investigation.

Many clients assume that conversations with their accountant are confidential in the same way that communications with their lawyer are protected by the attorney-client privilege.

In a federal criminal investigation, that assumption can be wrong.

There is generally no federal accountant-client privilege. But under certain circumstances, the attorney-client privilege can extend to communications with an accountant retained to assist an attorney in providing legal advice.

The distinction can become critical when an accountant receives a federal grand jury subpoena.

Federal criminal defense attorney Michael J. Petro has more than 35 years of experience representing individuals facing federal grand jury investigations, tax investigations, fraud allegations, and other serious federal criminal matters.

Can a Federal Grand Jury Subpoena Your Accountant?

Yes.

A federal grand jury has broad investigative authority and may subpoena documents and testimony from third parties, including accountants.

An accountant may possess highly significant evidence concerning:

• Tax returns
• Financial statements
• Bank accounts
• Business income
• Expenses
• Payroll
• Corporate records
• Bookkeeping
• Loans
• Asset purchases
• Communications with the client
• Communications with attorneys
• Work papers
• Amended tax returns

The fact that the accountant provided professional services to the target of an investigation does not, by itself, prevent the government from obtaining those records.

Is There an Accountant-Client Privilege in a Federal Criminal Case?

Generally, no.

The Seventh Circuit stated the rule directly in In re Grand Jury Proceedings, 220 F.3d 568 (7th Cir. 2000): there is no general accountant-client privilege under federal law.

That case involved a federal grand jury investigating alleged tax fraud. The grand jury subpoenaed documents from accountants hired by attorneys representing the individual under investigation.

The defendant argued that the documents should be protected by attorney-client privilege because the accountants were working as agents of his lawyers.

The Seventh Circuit recognized that some communications involving an accountant can potentially receive attorney-client protection—but only under particular circumstances.

Attorney-Client Privilege Can Sometimes Extend to an Accountant

The fact that an accountant participates in a communication does not necessarily destroy attorney-client privilege.

An accountant may sometimes act as an agent of the attorney when the accountant’s assistance is necessary or highly useful to the lawyer’s ability to understand complex financial information and provide legal advice.

This principle is commonly associated with United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).

The Seventh Circuit recognizes the same principle.

The critical question is whether the accountant was assisting the lawyer in providing legal advice.

If the accountant is merely providing accounting advice or ordinary accounting services, attorney-client privilege generally does not arise.

What Is a Kovel Accountant?

Lawyers frequently refer to an accountant retained for this purpose as a Kovel accountant.

The basic concept is similar to a lawyer using an interpreter.

Federal criminal investigations involving taxes, corporations, bank accounts, complicated financial transactions, or alleged fraud may involve accounting issues that an attorney needs assistance understanding.

The lawyer may retain an accountant to:

• Analyze financial records
• Explain accounting concepts
• Trace transactions
• Assist counsel in understanding tax issues
• Analyze government calculations
• Help counsel prepare a defense
• Assist with interviews
• Evaluate potential criminal exposure
• Help the attorney understand complicated financial evidence

When the accountant’s work is genuinely performed to facilitate the attorney’s provision of legal advice, communications made for that purpose may fall within attorney-client privilege.

But merely calling an accountant a “Kovel accountant” does not create a privilege.

Hiring the Accountant Through the Lawyer Is Not Enough

This is an important limitation.

A lawyer cannot transform ordinary accounting work into privileged legal work simply by hiring the accountant instead of having the client hire the accountant directly.

Courts examine what the accountant was actually doing.

If the accountant was hired to perform ordinary accounting services, the fact that the engagement letter came from a law firm does not necessarily protect the work from a grand jury subpoena.

The Seventh Circuit focuses on the actual purpose of the communication and the accountant’s work.

Tax Return Preparation Is Generally Not Privileged

This distinction becomes particularly important in federal tax investigations.

The Seventh Circuit has held that preparing tax returns is an accounting service, not the provision of legal advice.

Information transmitted to an attorney or an attorney’s accountant for the purpose of putting that information on a tax return generally is not protected by attorney-client privilege.

That makes sense because information intended to appear on a tax return is intended to be disclosed to the government.

By contrast, confidential information provided to an accountant to help the attorney provide legal advice may be privileged.

Dual-Purpose Documents Can Create Problems

What happens when an accountant’s work serves two purposes?

Suppose an accountant is helping prepare tax returns while simultaneously assisting defense counsel in responding to a criminal tax investigation.

The Seventh Circuit has taken a restrictive approach.

In In re Grand Jury Proceedings, relying on its earlier decision in United States v. Frederick, the court explained that documents used both to prepare tax returns and for litigation are generally not privileged.

That creates an important practical concern.

When an accountant is retained to assist criminal defense counsel, the engagement and work should clearly distinguish legal-defense assistance from ordinary tax preparation or accounting services.

In re Grand Jury Proceedings

The Seventh Circuit’s decision in In re Grand Jury Proceedings, 220 F.3d 568 (7th Cir. 2000) provides an excellent example.

A federal grand jury in the Northern District of Illinois was investigating Dr. Basaam Osman for alleged tax fraud involving his personal and medical-business tax filings.

The grand jury subpoenaed numerous documents from accounting firms hired by attorneys representing Osman.

The accounting firms produced more than 2,000 documents but withheld certain materials based upon Osman’s assertion of attorney-client privilege.

The dispute eventually reached the Seventh Circuit.

The Court Required a Document-by-Document Analysis

The Seventh Circuit rejected the idea that the documents could simply be classified together as either privileged or nonprivileged.

Instead, the privilege analysis was highly fact-specific.

The court required consideration of the purpose for which particular documents were created, how they were used, the circumstances surrounding their transmission, and whether they were genuinely connected to the lawyer’s provision of legal advice.

The court ultimately remanded the case for additional findings concerning the disputed documents.

This provides an important practical lesson:

A privilege claim involving an accountant should generally be evaluated on a document-by-document and communication-by-communication basis.

Existing Accounting Records Do Not Become Privileged

Another important principle is that attorney-client privilege generally protects confidential communications, not underlying facts or preexisting documents.

Suppose a business already possesses:

• Bank statements
• General ledgers
• Payroll records
• Invoices
• Tax returns
• QuickBooks files
• Expense records
• Corporate records

Giving those documents to a lawyer—or to an accountant retained by the lawyer—does not ordinarily transform the underlying records into privileged documents.

The privilege analysis instead focuses on confidential communications made for the purpose of obtaining or providing legal advice.

This distinction can be extremely important when responding to a grand jury subpoena.

The Engagement Letter Matters

When an attorney retains an accountant to assist with a criminal investigation, the engagement letter can become important evidence concerning the purpose of the accountant’s work.

Later Seventh Circuit authority has described the engagement letter as particularly significant when determining whether communications with an accounting professional fall within attorney-client privilege.

A properly structured engagement should accurately describe the accountant’s role.

If the purpose is to assist defense counsel in understanding financial information necessary to provide legal advice, the engagement should reflect that reality.

It should not falsely characterize ordinary tax preparation or accounting work as legal-defense work.

Who Should Retain the Accountant?

When an accountant is needed specifically to assist with a federal criminal defense, there can be an important advantage to having defense counsel retain the accountant.

That structure helps establish that the accountant is assisting counsel rather than simply providing independent accounting advice to the client.

But again, form alone is not enough.

Courts will look at substance.

The actual work performed must support the claimed legal purpose.

What Happens When the Accountant Receives a Grand Jury Subpoena?

An accountant who receives a federal grand jury subpoena should not simply assume that everything must be turned over immediately.

Likewise, the client should not instruct the accountant to ignore the subpoena.

The subpoena should be reviewed promptly.

Important questions include:

• What documents are requested?
• What time period is covered?
• Is testimony required?
• When is compliance due?
• Was the accountant retained directly by the client or by counsel?
• What services did the accountant perform?
• Are any communications potentially privileged?
• Are documents responsive but protected by another legal doctrine?
• Does the subpoena create Fifth Amendment issues for a sole proprietor or other custodian?
• Is the subpoena unreasonably broad or burdensome?
• Should counsel communicate with the prosecutor before production?

These questions should be addressed before responsive material is produced.

Do Not Voluntarily Produce Potentially Privileged Communications

Privilege can be waived.

If an accountant possesses communications that may be protected by attorney-client privilege, voluntarily producing them to the government without first analyzing the privilege issue can create significant problems.

Once privileged material is disclosed, recovering confidentiality may be difficult.

A careful privilege review should therefore occur before production, not after the documents have already been delivered to the grand jury.

A Privilege Log May Be Required

When responsive documents are withheld based upon attorney-client privilege, counsel may need to identify the withheld materials through a privilege log or similar procedure.

A privilege log typically provides enough information for the government and court to evaluate the privilege claim without revealing the privileged substance itself.

Depending upon the circumstances, it may identify:

• Date
• Author
• Recipient
• General nature of the document
• Basis for asserting privilege

The precise procedure depends upon the case and the court.

In-Camera Review

When the government disputes a privilege claim, the court may review contested documents in camera—privately, without providing them to the government—to determine whether privilege applies.

That occurred in In re Grand Jury Proceedings.

The district court examined disputed accounting documents and determined that some should be produced while others could be withheld.

The Seventh Circuit later required additional findings concerning the privilege determinations.

In-camera review can therefore provide a mechanism for resolving privilege disputes without automatically disclosing the contested communication to prosecutors.

What About the Federal Tax Practitioner Privilege?

Federal law contains a limited statutory confidentiality provision for certain communications between taxpayers and federally authorized tax practitioners.

It appears in 26 U.S.C. § 7525.

But there is a critical limitation:

The statute applies to specified noncriminal tax matters and noncriminal federal tax proceedings.

It does not create a general privilege that protects accountant communications in a federal criminal grand jury investigation.

This distinction is extremely important.

A taxpayer should not assume that § 7525 prevents a federal grand jury from obtaining communications from an accountant during a criminal tax investigation.

The Crime-Fraud Exception

Even communications that would otherwise qualify for attorney-client privilege may lose protection under the crime-fraud exception.

Attorney-client privilege cannot be used to protect communications made for the purpose of obtaining assistance in committing or furthering a crime or fraud.

This does not mean privilege disappears merely because the government accuses the client of a crime.

A person under investigation must be able to obtain confidential legal advice concerning past conduct.

The issue is different when legal or professional services are allegedly being used to facilitate continuing or future criminal conduct.

Grand Jury Investigations Often Begin Before Charges Are Filed

A federal grand jury subpoena can arrive before the client has been charged with anything.

That does not make the subpoena unimportant.

The grand jury may be attempting to determine:

• Whether a federal crime occurred
• Who participated
• How much money was involved
• Whether tax returns were false
• Where funds went
• Whether additional witnesses should be subpoenaed
• Whether search warrants should be obtained
• Whether an indictment should be returned

The response to an accountant subpoena can therefore become part of the defense strategy before an indictment exists.

Accountant Subpoenas in Federal Tax Investigations

Accountant subpoenas are particularly significant in investigations involving alleged:

• Tax evasion
• Filing false tax returns
• Failure to file returns
• Payroll tax violations
• Employment tax offenses
• Business expense fraud
• Offshore accounts
• Unreported income
• False deductions
• Health care fraud
• Bank fraud
• Wire fraud
• Money laundering

The accountant may possess both ordinary business records and communications relating to sensitive legal issues.

Those categories should not automatically be treated the same way.

Federal Agents May Also Interview the Accountant

A subpoena is not the only way the government may seek information.

IRS Criminal Investigation, FBI agents, or other federal investigators may contact an accountant and request a voluntary interview.

That creates separate considerations.

An accountant who is contacted by federal investigators should understand whether the government views the accountant as:

• A witness
• A subject
• A potential target
• A custodian of records

The client should also understand that communications with an independently retained accountant may not be privileged merely because the client expected them to remain confidential.

The Best Time to Address Privilege Is Before the Subpoena Arrives

In a serious federal investigation involving complicated financial issues, privilege should be considered when the defense team is assembled—not months later when a subpoena arrives.

If defense counsel needs accounting expertise to provide legal advice, the relationship should be structured appropriately from the beginning.

That includes clearly defining:

• Who retained the accountant
• Why was the accountant retained
• What work will the accountant perform
• Who will receive the accountant’s communications
• Whether ordinary accounting services will be performed separately
• How documents and communications will be maintained

Proper structure cannot create a privilege where none legally exists.

But poor structure can unnecessarily jeopardize a legitimate privilege.

What Should You Do If Your Accountant Receives a Federal Grand Jury Subpoena?

The most important step is to address the subpoena immediately.

Do not assume the accountant will know which materials may be privileged.

Do not assume everything in the accountant’s files is protected.

And do not assume nothing is protected.

Counsel should determine what the government is seeking and conduct a careful review of potentially responsive material before production.

When necessary, defense counsel can communicate with prosecutors, assert appropriate privilege claims, prepare a privilege log, seek judicial review, or request in camera review of disputed documents.

The Key Question: Why Was the Accountant Involved?

The central lesson from In re Grand Jury Proceedings is straightforward.

The question is not simply:

Was an accountant involved?

Nor is it:

Did a lawyer hire the accountant?

The more important question is:

Was the accountant assisting the attorney in providing confidential legal advice, or was the accountant performing ordinary accounting work?

The answer can determine whether the communication is protected from a federal grand jury subpoena.

Experienced Federal Grand Jury Defense Attorney

Michael J. Petro has more than 35 years of criminal defense experience representing individuals facing serious federal criminal investigations and prosecutions.

A federal grand jury subpoena directed to an accountant can expose sensitive financial information before criminal charges have even been filed. The absence of a general accountant-client privilege makes it important to determine whether particular communications may instead qualify for protection under attorney-client privilege.

When an accountant has been retained by defense counsel to assist in providing legal advice, the privilege question requires careful examination of the accountant’s actual role and the purpose of each communication.

If you or your accountant has received a federal grand jury subpoena—or you are under investigation for tax fraud, financial fraud, or another federal offense—contact federal criminal defense attorney Michael J. Petro to discuss the subpoena before documents are produced.