Tax practitioners have enough
concerns without having to fear the specter of a
professional liability claim resulting from a
preventable mistake or oversight. Many of these
slip-ups can be prevented by simply jotting a
contemporaneous note recording the rationale for
an election or flagging a filing deadline on the
calendar. Early, thorough and well-documented
communication with the client—including a
well-crafted engagement letter—is key, as are
close attention to filing deadlines and thorough
double-checking of all return information. Here
are some common trouble spots that tend to trigger
a substantial number of claims.
ESTATE TAX RETURN LATE PENALTIES
The deadline for filing an estate
tax return is based on the decedent’s date of
death. Because it’s not a regular date (like the
April 15 deadline for individual returns), it is
sometimes overlooked, resulting in late filings.
To make matters worse, because of the large tax
amounts reported on estate tax returns, the late
filing penalties often exceed $100,000. CPAs
ensnared by such claims usually didn’t pay enough
attention to their calendaring system for due
dates or didn’t have a system at all.
also incur late payment penalties for estate tax
returns by not realizing that:
A payment extension request requires
completion of a separate section of IRS form 4768.
The payment extension is not
automatic (like the filing extension for
individuals); it requires a showing of “reasonable
The IRS has discretion whether to
grant the payment extension because of the
“reasonable cause” requirement. Therefore, the
extension should be requested well in advance of
the estate tax return due date to account for the
contingency of an IRS denial.
ENTITY SELECTION ISSUES
Claims arise because the CPA rather than the
client chose the “best” legal entity for the
client’s new business and did not document the
advice provided to the client. Each entity type
has advantages and disadvantages. If unforeseen
events occur after the business has launched, a
selected entity’s disadvantages can be triggered.
If they are, a client may complain that a
different entity type would have better addressed
the situation. The CPA must provide clients full
information regarding available entity types and
the advantages and disadvantages of each. After
receiving that information, clients—not the
CPA—must select the entity they feel is the best
fit for their new businesses.
PENALTIES FOR FEDERAL FORMS 5471 AND 5472
A $10,000 penalty applies to failure to file
a form 5471, Information Return of U.S.
Persons With Respect to Certain Foreign
Corporations, or form 5472, Information
Return of a 25% Foreign-Owned U.S. Corporation
or a Foreign Corporation Engaged in a U.S. Trade
or Business. The penalty most often is
triggered when the CPA is not aware of the forms’
filing requirements, which are extremely complex.
Your firm should ask the following questions to
determine whether a client might be required to
file the applicable form. If the answer to either
question is “yes,” you should consult the relevant
form’s instructions to determine if, in fact, your
client must file the form:
Form 5471. Is an
individual client an officer or director of a
foreign corporation? Or does a client own 10% or
more of a foreign corporation’s stock?
Form 5472. Is any
corporation client a foreign corporation or owned
25% or more (directly or indirectly, by vote or
value) by a foreign individual or entity?
SECTION 754 ELECTIONS
When a partnership has made an IRC section
754 election, an individual partner can obtain an
asset basis step-up for his or her share of the
partnership assets upon the death of another
partner, a sale of the partner’s interest or
certain other events. Claims in this area usually
arise because the CPA missed a section 754
election opportunity or failed to properly
document why the election was or was not made. To
avoid missing section 754 elections, each year
before preparing a partnership return, the CPA
firm should request information on any partner’s
death or partnership interest disposition. The
information can be requested in the data
organizer. Once the CPA has that information, it
is easier to identify section 754 election
opportunities. The CPA should then provide the
client full information regarding a section 754
election and its potential benefits and
detriments. The client should then decide whether
or not to make the section 754 election.
While a section 754 election is beneficial in
most circumstances, it is impossible to predict
whether future events might render it detrimental.
Therefore, the CPA should send a written
confirmation of the client’s decision regarding
the election. That confirmation will prevent the
client from holding the CPA responsible if future
events render the section 754 election
By Keith R. Lee , CPA, J.D.,
staff taxation counsel for CAMICO, a CPA-owned
mutual insurance company.