With tax season currently underway, this is the busiest time of the year for many accounting and tax preparers. Clients of all shapes and sizes – from individual filers to big corporate accounts – come crawling out of the woodwork for these crucial services. Often many of these clients show up at the office’s door at the very last possible moment hoping to get their taxes filed on time.
As this time of the year becomes busier and clients wait later and later in the year to bring in their necessary financial paperwork, it leaves the door open for a greater chance of mistakes, errors and omissions on their complicated tax forms. Certified public accountants and other public accountants can’t afford to suffer these risks as they not only hurt their business, but also expose their clients to undue burdens as well.
As noted by the American Institute of Certified Public Accountants in its “Statement for Standards for Tax Services,” any professionals who handle tax filings have a duty to exercise a level of care, skill and diligence to competently perform these tasks and complete the paperwork accordingly.
To successfully bring a malpractice suit against a tax preparer, a plaintiff must prove that the tax preparer had a duty owed to the taxpayer, this duty was breached causing injuries – typically financially – and a proximate cause between the duty and the injury suffered existed.
There are several ways these tax professionals can limit their exposure to risks and avoid falling into the pitfalls that seriously hurt other individuals in this industry:
Avoiding casual advice
Attending dinner parties or even running simple, everyday errands can turn into a potential minefield for many CPAs, enrolled agents or other tax practitioners. Some family members might constantly be asking thorny questions about deductions and depreciation. Or a friend of a friend could bring up the taxable gains accrued on the stock options for his or her burgeoning small business. Even inadvertently offering up a hypothetical suggestion could potentially expose the CPA to a claim if the individual takes this advice and it leads to financial declines or improper filings.
As noted by the Journal of Accountancy, it’s best to avoid casually offering advice. Further, if a CPA or agent is speaking with a someone who is not a client, it’s wise to ensure the person understands no agreement or contract has been entered into and that tax consequences differ greatly from one set of taxpayer’s facts and circumstances to the next.
This makes it vitally important that any professional advice passed out be prefaced with a warning. If the individual continues to press the tax professional for counsel, it might be time to draft an official engagement letter and have the advice-seeker become a bill-paying client instead.
Consulting with prospective clients
The majority of new clients for any CPA or tax professional will require an initial consultation to determine the nature and scope of the potential accounting work needed for the case. This allows the CPA to analyze the client’s potential needs, including how much work will be involved, the difficulty of these tasks and an estimate for the cost of the job. Without having the initial consultation, it’s next to impossible to accurately forecast the resources needed to complete the case and service the client’s needs.
However, these initial consultations can be dangerous if not properly handled. Many prospective clients will engage in what’s known as opinion shopping, which involves them going from one office to the next to gather as much information as possible and attempt to perform the necessary work themselves.
Ensure you inform all new individuals seeking your services that no CPA-client relationship exists until they sign an engagement letter and are officially your client. Further, it’s important that this engagement letter cover the full range of duties and responsibilities involved the entire tax filing.
“The ultimate decision to file an amended return is up to the taxpayer.”
Failing to amend returns
Despite putting forth the best effort to file the more accurate tax records possible, there remains a chance that an error slips in. Once an error or omission on the tax return arises, the preparer has a professional responsibility to advise the taxpayer of the discrepancy and the potential consequences that may arise if this problem is not rectified. While the ultimate decision to file an amended return is up to the taxpayer, it’s up to the CPA to terminate the relationship if it seems likely that the client is not willing to update the information provided to the IRS.
Further, once the tax preparer has received consent from the client to file an amended return, it’s important that this amended document gets filed immediately, so as not to cause any penalties or accusations of failing to act in good faith.
Who can help?
No matter how many precautions are undertaken and how many policies are put into place to reduce the number of errors for a professional tax preparer, the unfortunate truth is that disasters will still occur. Thankfully, CPAs and other tax professionals can get the protection they need with McGowan Risk Specialist’s Professional Liability Division. Brokers who partner with McGowan gain access to a wealth of knowledge from our experienced team of industry specialists who understand the risks associated with preparing taxes and handling clients’ sensitive financial documents.