SUBPOENAS OF TAX RECORDS

How should a tax preparer proceed when faced with a subpoena requesting tax records in Tennessee?[1]

The subpoena power of Tennessee Rule of Civil Procedure 45.02 allows a party pending litigation to “command” a non-party to produce documents, papers, and records (including electronic data). A party in litigation seeking tax returns from a non-party would proceed under this Rule. Generally, assuming the subpoena was issued and served correctly, the non-party must comply with the subpoena.

However, issues arise when the requested documents are tax returns that the producing non-party prepared or helped prepare. Federal law directly addresses the disclosure of tax returns in such a situation. It is a misdemeanor punishable by an up to $1,000 fine for tax preparers to knowingly or recklessly disclose or use information provided to the tax preparer in connection with preparing tax returns. See 26 U.S.C. § 7216(a). Importantly, though, there are exceptions to this rule. For instance, the above rule does not apply to disclosures made under other Internal Revenue Code statutes or pursuant to court orders, and the above statute only applies to federal tax returns. See 26 U.S.C. § 7216(b). This exception raises the question of whether a subpoena is technically “an order of a court” within the meaning of 26 U.S.C. § 7216(b). Of course, a court order (rather than a subpoena) requiring the production of a tax return would eliminate the risk faced by a tax preparer in handing over any returns.

Options in Responding to a Subpoena of Tax Records

In light of this federal statute, a tax preparer may hesitate to produce a client’s tax returns in response to a subpoena under Tennessee Rule of Civil Procedure 45.02. Additionally, a tax preparer may also be concerned that failing to comply with the subpoena could result in the court holding the tax preparer in contempt. What is the proper course of conduct?  Neither Tennessee state nor federal courts in the United States Sixth Circuit have squarely addressed how a tax preparer should govern itself when served with a Rule 45.02 subpoena requesting a client’s tax returns.[2] However, case law from other courts suggests possible courses of action that would likely be appropriate for a tax preparer. Of course, tax preparers faced with this situation should always seek the advice of counsel.

Guidance From a Recent Court Decision

In Primrose Retirement Communities, LLC v. Omni Construction Co., Inc., an Ohio federal district court ruled on a plaintiffs’ motion to compel the production of documents pursuant to a subpoena served on a non-party—the defendant’s former accounting firm. No. 1:18-mc-0130, 2019 WL 6771210, at *1 (N.D. Ohio Dec. 12, 2019); see also Tenn. R. Civ. P. 45.07 (comparable state law rule on motions to compel). The Ohio district court made several notable comments on this issue and provided a brief overview of the relevant case law in the Sixth Circuit.

First, the court explained that tax returns are not necessarily privileged from federal discovery, but “great caution” is necessary when disclosing tax returns. Id. at *2. The court noted that the plaintiffs could have avoided burdening the non-party accounting firm by directing the subpoena to the defendant rather than the accounting firm. Id. at *3. Ultimately, the court granted the plaintiffs’ motion to compel but declined to issue sanctions against the non-party accounting firm for failing to respond to the subpoena. Id. at *4. In doing so, the court explained that the accounting firm’s “reluctance to disclose its client tax records was likely the result of [the accounting firm’s] obligations under 26 U.S.C. § 7216(a).” Id. Of course, with this ruling, a court order required disclosure, which ensured that the accounting firm’s subsequent production of tax records would not run afoul of 26 U.S.C. § 7216.

Overall, the court seemed sympathetic to the position of the non-party accounting firm, and while the court ultimately ordered the production of the records, it found a contempt sanction inappropriate. The court’s decision not to hold the accounting firm in contempt for the its non-compliance with the subpoena should be welcome news to a tax preparer evaluating their options in responding to a similar subpoena.

Other Considerations

It is worth mentioning that, in state court, a non-party served with a subpoena can serve a written objection to the subpoena on the issuing party within 21 days of receiving the subpoena. See Tenn. R. Civ. P. 45.07(2). Importantly, if the non-party does not object within 21 days, it will not be allowed to challenge the subpoena, except for objecting to the cost of producing the requested documents. See Tenn. R. Civ. P. 45.07(4). A tax preparer faced with a subpoena for tax records might be well served to object to the subpoena on the grounds of 26 U.S.C. § 7216, at least to avoid complicating the situation by waiving its ability to rely on 26 U.S.C. § 7216.

Additionally, if a party issuing a subpoena files a motion to compel against the subpoenaed non-party, the court has the authority to modify or limit the scope of the subpoena and to order the requesting party to pay the cost of production of the documents subject to the subpoena. See Tenn. R. Civ. P. 45.07(4).

Privilege

Under Tennessee Rule of Civil Procedure 45.08(2)(A), documents requested by a subpoena may be withheld pursuant to an assertion of privilege. In the situation discussed herein, a relevant privilege may be the accountant-client privilege under Tennessee law. This privilege exists through state statute. Under Tenn. Code Ann. § 62-11-116(a), licensed accountants generally may not “divulge any information that is communicated to them or obtained by them by reason of the confidential nature of their employment.” But see First Horizon Nat’l Corp. v. Houston Cas. Co., No. 2:15-cv-2235-SHL-dkv, 2016 WL 5867268, at *9 (W.D. Tenn. Oct. 5, 2016) (noting that the privilege “applies only to confidential information . . . [and] to come within the terms of the statute the information must have been communicated to the accountant in a confidential setting arising from the employment”).

However, a key component of this privilege is that the privilege is personal to the client rather than the accountant. That is, only the client may waive the privilege. See generally Fed. Ins. Co. v. Arthur Andersen & Co., 816 S.W.2d 328 (Tenn. 1991).

Of course, the question remains whether this privilege would apply to the disclosure of tax returns by a tax preparer pursuant to a subpoena issued under Tennessee Rule of Civil Procedure 45. Upon review, there appears to be no case law addressing the disclosure of tax returns in the context of the accountant-client privilege.

Conclusion and Options

•  Consult an Attorney

o   A tax preparer evaluating their options in responding to a Tennessee Rule of Civil Procedure 45 subpoena requesting the tax returns of the tax preparer’s client(s) should consult an attorney to avoid violating Tennessee Rule of Civil Procedure 45, 26 U.S.C. § 7216, and/or the accountant-client privilege.

• Consider Objecting to the Subpoena Before the Deadline Passes

o   The tax preparer should also be diligent and mindful in deciding whether to object to the subpoena on the grounds of privilege or state or federal law. In state court, the tax preparer only has twenty-one days to object.

• Do Not Assume the Court will be Lenient

o   While courts may understand a tax preparer’s hesitancy in disclosing tax returns, this does not guarantee that a court would not issue sanctions against a non-party failing to comply with a Rule 45 subpoena.

• Request an Order from the Court

o   One possible option (assuming there are no other issues related to privilege) may be for the subpoenaed non-party tax preparer to request the court directly to order the disclosure, thereby eliminating the risk of violating 26 U.S.C. § 7216.

The information in this blog post is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from Meridian Law, PLLC or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.

[1] For purposes of this article, a “tax preparer” is anyone who, as part of their business, is involved in the preparation of federal tax returns. See 26 U.S.C § 7216(a).

[2] In fact, there do not appear to be any cases from Tennessee state courts addressing 26 U.S.C. § 7216.