Despite the availability of tax preparation software, plenty of people entrust their federal tax preparation to accountants and other tax preparation professionals. This is especially true for business owners and taxpayers whose returns are complicated by foreign investments, capital gains, inheritance and other issues that take them out of the norm. If you fall into this category and subsequently received notice from the IRS of an error on your federal tax return, you’re not alone. It happens all too frequently, and for many it means more than simply paying the government more money. In some cases, it means being assessed tax penalties and interest on the shortfall. So is an accountant liable for accounting malpractice?
The liability for this type of error is dependent upon what the cause of the mistake was. If the error on your return was a result of you having provided incomplete or inaccurate information, then the fault lies entirely with you. If, however, the accountant made a math error or forgot to include critical information carelessly, the mistake may be viewed as having been in good faith — an honest mistake — in which case the IRS is likely to waive penalties. The real issue arises when the preparer’s errors are a result of recklessness. In that case the IRS is likely to impose a monetary penalty on the accountant, and if it is believed that the mistake was purposeful then the IRS may sanction them so that they are barred from preparing any other federal tax returns for a specified period of time. In fact, the accountant may be asked to re-open other returns that they have prepared for review.
There are specific laws regarding liability on the part of a tax return preparer. If taxes are understated due to them taking an “unreasonable position” that they knew or should have known was wrong, or if they understated taxes due to “willful or reckless conduct,” they can be assessed a penalty. The same law states that if they had reasonable cause or the mistake was made in good faith then they will be exempt from penalties. As for your own responsibility for paying the taxes, if the error on your federal taxes was a result of negligence or malpractice on the part of the accountant then you remain responsible for any additional income tax that you owe, but you can file a claim against them for penalties and interest.
Determining whether your accountant acted reasonably and in good faith may be difficult for you to assess, but an experienced accounting malpractice attorney can help. Contact us today to learn more.