Planning to mitigate risk in tax planning engagements

By Deborah K. Rood, CPA

Do your clients request or, more likely, expect tax planning services beyond traditional tax compliance services? While tax planning may be rewarding and interesting work for many CPAs, these services also present professional liability risk. Often, the services involve identifying the client's personal financial goals so the CPA can design strategies and make specific recommendations that, when implemented, assist the client in achieving his or her goals. Many CPAs do not realize that the AICPA Statement on Standards in Personal Financial Planning Services (SSPFPS), in addition to the AICPA Statements on Standards for Tax Services (SSTSs), apply to such services.

A professional liability claim may occur if a client's expectation and the results of the tax and/or personal financial planning services do not coincide. Defense of this claim may be challenging if the firm did not comply with all applicable standards. Consider this scenario:

A CPA firm prepared tax returns for a family business and individual returns for family members. The business was owned by the father with his two sons holding a minority interest. Nearing retirement, the father wanted to transfer his share of the company to his children while retaining control of operations until he gained confidence in his sons. In addition, he wanted his grandchildren to benefit from his hard work in building the family business. The CPA firm partner recommended that the father gift his stock to a new trust and designate his sons and grandchildren as beneficiaries. The client's business attorney was not experienced in trusts and estate planning, so the client asked the partner for a referral. The partner referred an attorney whom he had met at a networking event, but had never worked with, to assist the client in implementing the CPA's plan.

Four years later, the sons, now in charge of the company's operations after their father's retirement, decided to sell the business to a private-equity firm for a substantial gain. In anticipation of the sale, the trustee distributed the company stock to the beneficiaries.

The following year, a new partner at the CPA firm with extensive trust and estate experience was asked to prepare the trust's tax return. The new partner concluded that the trust did not qualify as a generation-skipping trust and that a 40% generation-skipping transfer (GST) tax applied to the distribution. The father brought a claim against the CPA firm, asserting the firm, not the client, should pay the tax in addition to the applicable penalties and interest. He claimed that he would not have created the trust, transferred the stock to it, or been subject to the GST tax had it not been for the partner's advice. The CPA firm reported the claim to its professional liability insurer who hired a defense expert to review the validity of the claim. As a result of this review, several issues were noted that adversely impacted the defense of the claim.


Issue: When the advice was originally provided, neither the engagement partner nor anyone else at the CPA firm had sufficient experience in estate or gift planning.

Risk management tip: All CPAs must comply with the General Standards Rule of the AICPA Code of Professional Conduct (see ET §1.300.001), which requires CPAs to undertake only those professional services the CPA or the firm can reasonably expect to complete with professional competence. While this CPA firm was capable of preparing the corporate and individual income tax returns for the client, it did not have experience in estate planning and gift tax ramifications. The CPA firm should have recommended that the client consult with another CPA firm or an attorney experienced in estate planning, or required the partner to obtain competence through training and interaction with experts.


Issue: Clients may hold a CPA firm responsible for a negligent referral to another professional if the professional's work does not meet the client's expectations and the client suffers damages as a result. In the example above, had the partner performed minimal review of the recommended law firm, he would have discovered that the firm specialized in general business matters, not estate planning as required by the client's needs.

Risk management tip: When providing referrals to other professionals, CPAs should document their recommendations in writing and provide more than one option so it does not appear that the CPA is providing a professional endorsement. The firm should also perform some high-level review of the professionals before offering a referral. The referral should include a statement advising that the client perform its own due diligence in selecting a professional and that the client must take responsibility for the selection. Finally, the CPA firm should clearly articulate the extent to which the firm will or will not oversee or evaluate the work of the professional or bear any responsibility for the professional's work product.

While all referrals should be made in this manner, paragraph .45 of the SSPFPS includes a requirement to document the referral and the CPA's responsibility regarding oversight of the other professional. The CPA firm in the above example did not do so.


Issue: While the CPA firm was diligent about obtaining signed engagement letters for the client's individual and corporate tax return preparation, one was not obtained for the estate and gift tax planning services. When the professional liability claim arose, the client's attorney successfully argued that key risk-allocation provisions included in engagement letters for tax return preparation services did not apply to the tax planning engagement.

Risk management tip: CPA firms should obtain an engagement letter for all engagements, especially high-risk or nonroutine engagements such as tax planning and representing clients in audits by taxing authorities. A well-written engagement letter clearly defines the specific scope of services. For this engagement, scope could have been defined as "assist the client in identifying options to transfer company ownership to the heirs in a tax-efficient manner after independent verification of the tax benefits by the client's estate planning attorney." In addition, CPA firms should consider including risk-allocation provisions such as choice of venue, limitation of liability, and alternative dispute resolution clauses to help manage professional liability risks if a dispute arises.


Issue: The CPA firm failed to document its advice to transfer the father's stock to a trust that would qualify for a GST tax exemption. Moreover, the firm did not document its advice counseling the client to seek an attorney experienced in estate planning matters to confirm the tax treatment and establish the trust. Finally, when the partner made the referral, there was no documentation of advice that the client perform his own due diligence on the attorney. In the absence of written documentation, the client's attorney was able to argue convincingly that the father did not understand the CPA's advice or what he was supposed to do.

Risk management tip: Documentation of advice provided does not have to be burdensome. In some instances, an email may suffice. Other situations necessitate more detailed, formal documentation. In determining the formality of tax advice, the following are some of the items that should be considered in accordance with SSTS No. 7, Form and Content of Advice to Taxpayers, including:

  • The importance of the transaction and amounts involved;
  • The specific or general nature of the taxpayer's inquiry;
  • The tax sophistication of the taxpayer;
  • The technical complexity involved; and
  • The need to seek other professional advice.

Considering the significance of the transaction in the scenario above, documentation should have been provided to the client in writing. Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), Sections 10.33 and 10.37, and the SSPFPS recommend or require that well-drafted documentation include the following information:

  • The client's goals;
  • Relevant facts;
  • Significant assumptions;
  • Estimates;
  • Application of the law to the facts and assumptions;
  • The conclusion supported by the law and facts;
  • Recommendations; and
  • Any qualifications or limitations of the advice and/or recommendations.

In addition to being either recommended or required by professional standards, documentation supports what advice was delivered to the client and provides evidence the CPA firm's defense counsel can use to defend a claim.


Issue: The CPA firm failed to comply with the AICPA Code of Professional Conduct (ET §1.300.001), SSTS No. 7, and SSPFPS paragraphs .19 and .45. In addition, various requirements of Circular 230 were not followed. When the partner was deposed, plaintiff's counsel used noncompliance with the professional standards to discredit the CPA firm. Especially troubling was the partner's inability to understand that the SSPFPS also applied to gift and estate tax planning engagements because the advice specifically addressed the client's identified personal financial goals.

Risk management tip: While most tax professionals are aware of the SSTSs and Circular 230, many do not realize that the SSPFPS also applies to situations where the CPA identifies the client's personal financial goals, designs financial strategies, and makes personalized recommendations that, when implemented, assist the client in achieving those goals. The lesson here is simple: Take care to understand all of the relevant professional standards that apply to a particular engagement and then follow them.

Deborah K. Rood ( is a risk control consulting director at CNA.

Continental Casualty Co., one of the CNA insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, the National Program Administrator for the AICPA Professional Liability Program, is available at 800-221-3023 or visit

This article provides information, rather than advice or opinion. It is accurate to the best of the author's knowledge as of the article date. This article should not be viewed as a substitute for recommendations of a retained professional. Such consultation is recommended in applying this material in any particular factual situations.

Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy. The relevant insurance policy provides actual terms, coverages, amounts, conditions, and exclusions for an insured. All products and services may not be available in all states and may be subject to change without notice.

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