Preparing Tax Returns and CPA Professional Liability Insurance
It’s an unfortunate fact that errors and omissions in preparing tax returns can and do happen. A Certified Public Accountant (CPA) might erroneously enter a number incorrectly, misinterpret a law, or make any number of unintentional mistakes. When an IRS audit occurs, as is likely the case, the CPA might discover the mistake, and will have to own their error. Any litigation will likely require CPA professional liability insurance to absorb the costs for defense.
The client will obviously be upset over the matter, but just how upset? In some cases, the client might merely need to file an amended tax return. But if the problem is bigger than that, and can’t be so easily rectified, the accountant may be sued for negligence. If so, acknowledging that malpractice has been committed can truly damage the CPA’s reputation, but the financial damage should be an even greater concern.
Mistakes and the CPA’S ethical obligations
If the tax preparer recognizes a mistake he or she has made and calls it to their client’s attention, things could possibly be smoothed over by persuading the client to submit an amended return. In many instances the accountant is better off preparing the amended return on behalf of their client, sending it to the client explaining the situation and the reason for the amendment, and suggest that by doing so everything should work out to the satisfaction of the IRS.
Hopefully the client understands that this is in their best interest and files it. In some cases, however, the mistake may involve more intricate accounting, which might complicate matters, and the taxpayer (client) must request permission from the IRS National Office to make such a change.
CPA’s and other preparers have an ethical duty with respect to any errors and omissions resulting from the work they submit. Some mistakes are larger than others and therefore have a much greater impact on their clients. This can result in the potential for malpractice damages exposure and the necessity for possible legal defenses.
Taxpayers have a legal duty within any applicable statute of limitations to pay the correct tax upon discovering an error or omission involving an understatement of income or an overstatement of deductions. A taxpayer should file an amended tax return and pay any tax due, and accountants should carry CPA professional liability insurance to aid them when they make costly errors on tax preparations.