Advisers beware: the cost of being sued is going up: courts in South Dakota and Pennsylvania held in favor of the taxpayers/plaintiffs on the recovery of interest paid on a tax liability in an accounting malpractice lawsuit. This article discusses these new cases and the existing case law from other jurisdictions on the issue.

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Advisers beware: the cost of being sued is going up: courts in South Dakota and Pennsylvania held in favor of the taxpayers/plaintiffs on the recovery of interest paid on a tax liability in an accounting malpractice lawsuit. This article discusses these new cases and the existing case law from other jurisdictions on the issue.

EXECUTIVE SUMMARY

* The number of malpractice cases brought against tax advisers for negligent tax advice has increased greatly in recent years. In most of these cases, the plaintiffs attempt to recover interest charged by the IRS on the tax liability that is a result of the adviser's negligence.

* There is no national rule regarding the recovery of interest, and the issue has been decided in the courts on a state-by-state basis, with some states yet to address the issue. Traditionally, recovery of interest is not allowed as a matter of law; however, in an increasing number of states, courts have held that the issue is a matter of fact and allow recovery if a plaintiff can prove damages.

* Courts in South Dakota and Pennsylvania held in 2006 that the recovery of interest is possible and is a matter of fact to be decided on a case-by-case basis.

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Negligent tax advice leads to most malpractice claims filed against CPAs. When a taxpayer relies on this erroneous advice and is harmed, the courts will attempt to compensate the taxpayer. In assessing damages, most courts agree that the tax deficiency itself is seldom recoverable; however, in cases of accounting malpractice, courts split on whether or not interest assessed by the IRS on the deficiency is recoverable.

In 2005, at a Tax Execu...

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