That feeling of satisfaction and accomplishment that accountants feel at the end of a successful tax season can be shattered by a phone call from a dissatisfied client or a summons and complaint asserting a liability claim, and the risk factors for that kind of unfortunate event vary from year to year.
The issues facing tax practitioners are a little different this year, according to Stephen Vono, senior vice president at McGowanPro. "Some of the exposures are new, and some are perennial exposures that are ongoing," he said.
For instance, there is a continued focus by the Internal Revenue Service on Employee Retention Credit submissions. Accountants had to reflect the ERC in the amended return, and the IRS delayed the ERC payment, so the returns are amended, but the clients are not getting their money back — and claims rise.
Vono recommended amending returns quickly and keeping track of expiration dates for statutes of limitations. The accountant needs to communicate with the client regularly, and ask them if they received their payment, or any other communication from the IRS.
A new area of concern involves tax planning resulting from to the One Big Beautiful Bill Act. Practitioners need to be aware that planning is essential for their clients, according to Vono: "At least advise that they need to plan. Again, communication is essential. The bill is far-reaching, so it touches everyone. The top exposure to tax preparers will likely occur by not staying current with all of the changes derived from the OBBBA."
Specifically, preparers may face the following new exposures in the filing season ahead, according to Vono:
- Not obtaining the maximum deductions available for their clients. Preparers should be alert for deductions involving tips and overtime, and to maximize deductions for seniors.
- Not advising clients to make the necessary financial decisions that may impact their taxable burden. Preparers should take advantage of car loan interest deduction; ensure that their client is aware of the caps for tip and overtime earning; and watch for expired clean energy credits.
- Not properly following the new tax provisions that will lead to filing errors.
Multiple state filings are fraught with tax claims, according to Vono. Continued residency audits by the state and local tax authorities are a risk that preparers should be aware of. These will uncover nexus issues, such as clients who claim they live in Florida, but they have property and their family doctor is in New York.
Among the perennial issues that Vono thinks tax pros may face again this year:
- Failure to detect fraud is an on-going exposure. Preparers need to verify information from the source when possible and have their "skeptics hat" on at all times.
- Accountants taking on engagements over their head, or outside of their skill set. "Have designations where applicable," Vono suggested. "For example, valuation services should have a CVA on the accounting team."
- Hackers seeking to access client files to obtain refunds or or to engage in any number of other shenanigans. Tax preparers should have full information security protocols in place and train staff far more than annually.
- Family disputes impacting the firm's ability to perform its services, or difficult, uncooperative, or low-integrity clients. Vono recommended considering early disengagement if information is not provided in a timely manner.
- Rogue firm partners or employees evading quality control policies/procedures.
- Concerning tax services, overlooked elections and missed filing deadlines continue to cause claims. "Always have a second set of eyes on an engagement and make the calendar your friend," he said.
- Relying on tax software only. "Complex returns need to be checked and reviewed," Vono warned. "The argument that it was a tax software error is not a good defense."
The penalty for not paying enough estimated tax than was owed in the previous year can be a rare trap for the unwary. Bill Nemeth, a Georgia practitioner, occasionally tells a client subject to the penalty that he has good news and bad news: The good news is that they're getting a refund from the IRS, and the bad news is they will be penalized because their refund is not big enough.
Although this might happen "once in a blue moon," according to Nemeth, it is due to a quirk in the Tax Code that practitioners should be aware of.
Deb Rood, risk control consulting director at CNA, underwriter for the AICPA professional liability program, pointed out some risks with the e-file signature authorization on Forms 8878 and 8879.
"The IRS requires the CPA firm to have a signed Form 8878 for the CPA to file an extension and a Form 8879 to file a tax return," she explained. "According to our claims group, all too frequently, the CPA does not receive this before electronically filing the tax return. That's bad."
"What happens if the client changes their mind about filing?" she asked. "For example, we had a claim with a voluntary disclosure where the client's attorney assured the CPA that the client could provide the e-file permission slip when they returned from a foreign trip, so the CPA filed the returns. The claim arose because the client changed their mind and stopped the voluntary disclosure process. However, the return had already been filed. Not good."
On the flip side, she noted that her team is often asked if the CPA can wait to file a tax return for which they have an e-file permission slip until the client pays its outstanding invoices — but the IRS requires that the CPA must electronically transmit the return within three days of receipt of the e-file permission slip.
"But it is too late to demand payment now if you already have the permission slip," she said. "We recommend that the CPA receive payment and a signed engagement letter before sending the e–file permission slip and finalizing the tax return."
