With busy season upon us, it is vital for practitioners to take note that this is the time that accountants are most likely to make errors that can lead to lawsuits.
Given the time constraints, deadlines and pressure of dealing with unfamiliar situations and new laws and regulations, it's no wonder that tax pros make mistakes. Liability professionals confirm this with the observation that tax services are the most frequent cause of liability lawsuits against accountants, although not the most severe.
One factor involved in liability claims against accountants is "scope creep," according to Stan Sterna, vice president and risk control leader at Aon, the program manager for the American Institute of CPAs' professional liability program.
For example, a tax engagement might result in failure to detect a defalcation.
"The claimant alleges that the accountant agreed to look at internal controls, or that was the expectation," Sterna explained. "Whenever a client expects the accountant to provide advice that is beyond the scope of a tax preparation engagement, that results in scope creep."
Scope creep can result from a casual conversation or simply a misunderstanding at the time of the engagement. And the best way to guard against it is through the use of engagement letters — which has, unfortunately, always been historically low, according to Sterna.
"It's the first line of defense of a professional liability claim," he said. "But tax practitioners find various reasons not to use them — too many clients, clients will take it as a CYA measure, it's a low-risk engagement, or 'We're friends and they would never sue me.'"
The engagement letter allows the accountant to define what is and what is not within the scope of the tax services the accountant is to provide and aligns expectations.
"It should be signed by the client and reissued every year so you can regularly review services and client needs," Sterna said. "If additional services are required, draft a separate engagement letter or amend the original to define the scope of and fees for these ancillary services."
"Advise your client that they need to sign the letter before you can commence your tax services," he advised. "That affords both you and your client the opportunity to ask questions about the nature of the services and clarify any confusion before starting any work."
And if the accountant feels reticent about requesting an engagement letter for their tax services, "Simply tell them that it's required by your insurance company," liability professionals advise.
Hitting the deadlines
If your client misses a due date, any role you played as tax preparer will be front and center in a claim, Sterna noted. "The number of professional liability claims involving missed due dates has been rising," he said. "While civil enforcement funding has been scaled back, the IRS has increased staffing and enhanced its technology in recent years, ramping up enforcement and portending fewer penalty abatements."
He advises practitioners to deploy a reliable form of docket system that tracks and alerts to due dates, respond-by dates and project status.
"While many practitioners already deploy some version of a docket system ranging from the humble spreadsheet to the full-bodied practice management software that lists forms and due dates, things still slip through the cracks, particularly during busy season," he said. "This is compounded by the myriad of statutory dates beyond annual, periodic tax compliance such as estate tax returns, income tax returns for estates, amended returns, and legislatively created deadlines. Your docket system's reliability is only as good as your interaction with it, so be diligent in inputting accurate and timely information."
It's also important to be careful who you share client data with, Sterna warned.
"Remember that Section 7216 requires client consent before disclosing to a third party any information furnished in connection with the preparation of a tax return," he explained. "Section 7216's consent requirements are more robust, and very specific language is required if tax information, particularly for individual tax clients, is disclosed to parties offshore. Violating Section 7216 can result in criminal penalties."
Sterna noted that the AICPA provides guidance on Section 7216, including a sample consent form available for download: "Remember, tax practitioners who are AICPA members or are CPAs in states where the AICPA Code applies to them must also comply with the AICPA Statements on Standards for Tax Services Section 1.3, Data Protection, which states that a CPA should make reasonable efforts to safeguard taxpayer data, including data transmitted or stored electronically."
He emphasized that data and personal information from your client is highly sensitive and losing that information could expose you not only to monetary damages but regulatory action and reputational harm.
Cyber criminals, he noted, are opportunistic and exploit times when your guard is down, such as during busy season. To mitigate risk, he strongly advised using an updated antivirus software, and a multifactor authentication system to access your network. He also recommended encrypted email communications and limiting access to client information to only those individuals with a clear need to access the data.
Lastly, as tax professionals work their way through busy season, they should be aware of any 2024 tax changes impacting 2025 filings, noted Sterna.
"Future extension of the TCJA, while not necessarily a busy season risk issue, is something that might need to be considered later this year," he said.
