Although most accountants prepare taxes, that’s not the only reason that professional liability claims against accountants are most frequent in the tax area.
Year after year, audit claims are the most severe among E&O (errors and omissions) claims, but tax claims are the most likely to be brought, according to insurance experts. Among other reasons, it can be attributed to so many changes in the tax law, especially since 2008, observed Randy R. Werner, a loss prevention executive at Camico.
“Preparers have a hard time just keeping up with tax law changes and advising and warning their clients,” she said. “There’s been an uptick in the common areas such as late filing and late payment. It goes back to trying to determine the preparer’s obligations to the taxpayer.”
“Then there are the complex areas such as S corporation or C corporation elections,” she said. “What happens is the clients think they have elected to be an S corporation, but they don’t follow through. The CPA files as if the entity is an S corporation, but it’s not because it never properly elected to be one. This is an example of problems downstream between the client and the CPA.”
“We see a lot of late filing and late payment in the estate tax area because there’s no regular filing date,” Werner said. “An estate return might be due on June 26. We recommend double calendaring when you do estate and trust work. Someone else should be responsible on that calendar as well as yourself.”
“Count back, determine what you need 90 days before the due date, then 60 days before it, then 30 days before it,” she advised. “That helps eliminate late payments and late filing issues.”
Another potential cause of professional liability of CPAs doing tax work is when they start dabbling in more complex areas in which they don’t have expertise, Werner added. “If you’re not an expert, farm it out,” she said. “This is especially true of estate and trust work—get your competency first. Don’t decide, ‘Well, my client of 20 years died, and I think I’ll help out the family.’ This can get you into a lot of trouble.”
FBAR (Foreign Bank and financial Accounts Report) issues have also become more prevalent, according to Anthony Cooper, a tax analyst in Camico’s Loss Prevention division. “The FBAR issue typically comes up because the accountant didn’t ask the right question,” he said. “Practitioners might learn about it through an organizer, or they might get a form that indicates interest from a foreign bank. Sometimes their clients receive an inheritance from someone abroad. There may be no income involved so the clients don’t think they have to tell practitioners.”
The penalties are stiff, so it behooves the practitioner to drill down to determine whether or not an FBAR is required.
The uncooperative client can be a potential area for liability, Werner observed. “For example, a CPA just told us they received an email from a client that he was away and couldn’t be back until after October 16. He’s on extension, and is not responding to the CPA’s emails that it will be too late.”
And these are just a few of the ways that tax practice can lead to liability.