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Taxpayer Had No Legitimate Expectation of Privacy in Records Held by CPA

(Parker Tax Publishing March 2017)

A district court denied a motion to suppress all evidence relating to tax records the IRS obtained from a taxpayer's CPA. The court rejected the taxpayer's argument that Code Sec. 7609 and the Code of Professional Conduct for CPAs conferred upon him a reasonable expectation of privacy in the documents he had provided to his accountant. U.S. v. Galloway, 2017 PTC 80 (E.D. Calif. 2017).

In a letter dated November 2006, the IRS informed Michael Galloway that his 2003 federal income tax return had been selected for audit and requested that he provide many tax related documents, including documents relating to a company he owned. In the middle of the audit, Galloway's CPA, Carl Livsey, sent him a letter that said he was terminating his accounting and tax services immediately due to Galloway's nonpayment of fees for services rendered. In August 2008, Galloway's case was approved for criminal investigation by the IRS Criminal Investigation Division (CID).

In April 2009, IRS CID special agents went to the office of Galloway's business, Catholic Online, in Bakersfield, California. When the agents approached the front door to the business, an unidentified male locked the door and informed the agents he was calling the police. The agents called the Bakersfield Police Department dispatch and informed them that two plain clothed and armed federal agents were waiting for the police. Prior to the police arrival, an individual exited the building and approached the agents. The agents informed him they wanted to provide Galloway with some information. The individual went back inside Catholic Online and shortly thereafter came out and provided the agents with the contact information for Galloway's attorney. Bakersfield police later arrived at the scene and the IRS CID agents departed.

After visiting Catholic Online, the special agents served Livsey with a summons requiring the production of records relating to his former client, Galloway. Livsey had prepared most of Galloway's tax returns, including the 2003 returns being audited. Livsey stated that he used profit and loss statements printed from Quickbooks and provided to him from Galloway's bookkeeper and wife to prepare the returns.

During the audit, Livsey was given an additional Quickbooks print to use to assist his analysis. Livsey noticed that the newly obtained Quickbooks print reflected dollar amounts that did not match the Quickbooks print he had used to prepare the 2003 tax return for Galloway. During the audit, Livsey showed the IRS auditor the Quickbooks printout with the additional information. Livsey also reviewed the payroll tax information for Galloway's business and concluded that the IRS correctly determined that Galloway owed payroll taxes.

Galloway was charged with four counts of attempting to evade and defeat payment of tax in violation of Code Sec. 7201.

Galloway sought suppression of all evidence obtained by IRS agents from Livsey because, he argued, Code Sec. 7609 and the Code of Professional Conduct for CPA's conferred upon him a reasonable expectation of privacy in the documents he had provided to his accountant. Alternatively, he argued that the district court should exercise its equitable powers to exclude from evidence at trial the business records that the government obtained due to the failure on the government's part to comply with the requirements of Code Sec. 7603 and Code Sec. 7609. Finally, Galloway suggested that the court should exercise its equitable authority to exclude the records obtained from Livsey because Code Sec. 7603 and Code Sec. 7609 address privacy interests akin to those protected by the Fourth Amendment (i.e., the right against unreasonable searches and seizures).

In 1976, Congress enacted Code Sec. 7609 to address third party summons served by the IRS to ensure that: (1) the taxpayer to whose business or transactions the summoned records related is informed of the summons and provided an opportunity to intervene in any enforcement proceedings; and (2) with so-called "John Doe" summons where the identity of the specific taxpayer is not known, the government makes a required showing in a court proceeding prior to issuance of the summons. Code Sec. 7609 provides that notice of a summons is sufficient if served in the manner as provided in Code Sec. 7603. Galloway also argued that even if his constitutional rights were not violated by how the government obtained his records, the court should exercise its equitable powers to exclude those records from evidence at his trial because the IRS violated the Code Sec. 7603 and Code Sec. 7609 requirements in obtaining them.

Galloway contended, in enacting Code Sec. 7609, "Congress recognized that a taxpayer has a reasonable expectation of privacy in those documents provided to third-party record keepers."

The district court rejected Galloway's arguments and held that it is a well-established principle that a person has no expectation of privacy in business and tax records turned over to an accountant because one has no reasonable expectation of privacy in information revealed to a third party and passed on to the government. In reaching this conclusion, the court cited the Supreme Court's decision in Couch v. U.S., 409 U.S. 322 (1973). Contrary to Galloway's assertion, the court said, the enactment of Code Sec. 7609 did not alter this well-established principle. The court held that as explained in the Congressional Committee Report, Code Sec.7609 is not intended to expand the substantive rights of parties.

The district court noted that, after the enactment of Code Sec. 7609, federal courts have continued to follow the binding authority of the Supreme Court's decision in Couch in concluding that a person has no expectation of privacy in business and tax records turned over to an accountant. Thus, Galloway's rights under the Fourth Amendment were not implicated by Livsey's production of records to the IRS. This would be the case even if no summons had been served. The court's conclusion was not swayed by codes of professional conduct addressing the disclosure of confidential client information by accountants, because there is no client-accountant privilege under federal law, the court said.

Finally, the court declined exclude Galloway's records from evidence due to the alleged failure by IRS agents to strictly comply with the procedural requirements of Code Sec. 7603 and Code Sec. 7609, noting that suppression of evidence has not been found to be a remedy where those statutes have been violated.

For a discussion of the special procedures under Code Sec. 7609 which allow the IRS to issue a summons to third parties, see Parker Tax ¶263,120.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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