CPA error + IRS audit = CPA liable?
 

Hoping the talent here can shed some light on this situation. We use a CPA to do our (personal) taxes every year and a recent IRS audit uncovered an issue where our taxes showed two home loans as equity loans (1 is home equity, the other is our primary). The accountant responded to the IRS inquiry, and we just received word from the IRS that we owe back taxes + a penalty based on this error. I understand that using an accountant carries risk with it, but is the accountant liable in this situation? Just trying to figure out how to handle this. Thanks in advance for any advice. SmileWavy

In the end you owe the money. Best you can hope for is to get the accountant to negotiate with the IRS and see if they will reduce any of the amount owed and penalty.

In my experience you will/should pay any tax difference, but if the error is with the CPA, then they should pay the penalty/interest.

My opinion as well, you owe the tax they owe the penalty.

Thanks for the advice, fellas. Not trying to get out of paying my fair share, but I am trying to determine how to deal with the CPA.

Don, how are things? It's been awhile.

Many times your accountant will take "aggressive" tax positions to reduce your taxes overall, which can create taxes and penalties on audit, our if disputed by the IRS. What do you want your accountant to to do for you? overpay to ensure that their is zero risk of a penalty or dispute?

I think the ony person responsible for your tax return is the owner, not the preparer. The preparer always sends you the completed return for review and signature. I would say that this effectively transferred responsibility to the reviewer.

Yes, my signature makes it my responsibility. I can't argue against that. However, if a mistake was made by the CPA...the service I pay for knowledge of tax code AND quality assurance...then I start to question fault.

An analog: If I pay a mechanic to do an oil change, I pick up the car and pay the bill (maybe even sign a release), and then the engine seizes because he forgot to put in oil. Is it my fault because I didn't go and check that oil was added after I paid an expert to provide exactly that service? I'm not the litigious type by any stretch, but I don't take well to poor quality/service.

+1

It will be interesting to hear what the preparer thinks they owe. If it was a true mistake, they may step up and pay you back. If they do pay you back - is it taxable income to you?

I suggest trying to negotiate who pays what percentage of the penalty with the CPA. I think the only way to compel the CPA to pay is to prove the CPA was negligent. I'd bet the legal costs to do so would far outweigh the penalty

Journal of accountancy says the courts generally find for the plaintiff when an error has occurred, not on the extra taxes but on the interest and penalties.

Some courts allow for recovery of interest, some courts allow recovery of incremental interest (over and above what was earned by the taxpayer) and some courts do not allow for interest recovery.

The penalties are more universally allowed for recovery by the taxpayer by most courts.

I would guess that they will pay you for some aspects of the incremental costs.

p.s. If your CPA won't cover the penalties, then find a new one as soon as this is resolved. You need someone who has some skin in the game.