Case in point: tax planning and the duty to inform a client.

• Author: Wolfe, Joseph

The Case

An individual hired a CPA to prepare his U.S. income tax return. At the initial meeting with the CPA, the client explained that he was planning to exercise some incentive stock options. The CPA discussed with the client several alternative approaches and the associated tax implications, but none of the advice was documented in writing. In October of the same year, the CPA sent a letter to the client reminding him to schedule an appointment to discuss year-end tax planning. The client did not respond. The fee charged by the CPA for the advice and preparation of the tax return was less than $1,000.

The following year, the CPA again prepared the client's tax returns. In preparing the returns, the CPA discovered that the client had exercised the stock options during the prior year but had not sold the stock prior to year-end. As a result, the client was subject to the alternative minimum tax (AMT). When the client learned about the large amount of tax owed and recognized that he would not be able to pay the tax liability without liquidating various assets at a loss, he presented a claim, alleging that the CPA had a duty to inform him of the potential for exposure to AMT from the exercisable stock options and to provide him with timely notification of the need to consider this prior to year-end.

The investigation of the claim revealed that the tax organizer submitted by the client for the preparation of the initial tax return mentioned that the client planned to exercise stock options during the current year. The CPA's file notes from the initial meeting with the client were incomplete and made no mention of AMT. Although the CPA was adamant that he had discussed the issue at length with the client and that the client understood both the exposure to AMT and the alternative tax approaches proposed, there was no evidence to support this position.

Additionally, the letter the CPA sent to the client did not discuss exposure to AMT, but simply reminded the client of the need to schedule an appointment to discuss tax planning. Given that there was evidence that the CPA was informed of the client's intent to exercise the stock options but no evidence that the client was informed of either the alternative tax approaches or the need to act prior to year end to manage the tax impact of exercising the options, the case was settled for a portion of the claimed damages, which consisted of the taxes on capital gains and the costs incurred in...