Professional liability in a tax practice.

• Author: Katch, Ronald S.

Do practitioners whose major responsibility is taxes need to be concerned about professional liability? Or do they believe such liability is chiefly the burden of auditors? Are they deceiving themselves in believing that clients do not make claims for tax mistakes"?

The facts indicate that tax professionals are not immune to professional liability claims. In 1991, 42.7% of all claims filed against CPA firms insured through the AICPA Professional Liability program were based on tax errors. And this is not a new phenomenon; the numbers have been consistent through the past few years: in 1990, 41.9%; 1989, 45.8%; 1988, 42.4%; and 1987, 41.796.

It makes perfectly good sense that tax practitioners are liable for claims. They do work for more clients in the tax area (usually individuals, small trusts and small partnerships) than in any other area of an accounting practice. All of these individuals seek help in the preparation of their tax returns. (Even the bookkeeping functions that are done for these clients are essentially tax work, since this is basically gathering the information necessary to prepare returns.) On the other hand, tax practitioners service fewer "corporate clients," for whom accounting and auditing are the major services provided.

It can be argued that there is greater exposure in an audit than there is for a tax return or any other tax engagement - if referring to larger dollar claims. The dollar amount of claims is generally higher for audits, but size of claims is not at issue here. Rather, the question is, where is there greater opportunity for a claim? There are greater risks on tax engagements simply because there are far more tax engagements. If a mistake is going to be made, it is more likely to occur on a tax engagement.

It is worth remembering that the most important element is not the amount of the claim, but the claim itself. The disruption to professional life is the same whether the claim is for an audit error or a tax error: the obligation to defend, the obligation to testify and to give depositions, and the necessity to discuss the issues with an attorney are the same.

The most prevalent error on tax engagements is surprisingly improper advice! not improper tax returns...