Does your CPA firm receive tax notices or other correspondence for clients? After all, what is truly involved? Forwarding mail every once in a while? Responding to IRS notices that the client is just going to send to the firm anyway? Or is there more? Consider the following scenario:
A CPA firm's client received numerous notices from both the IRS and state taxing authorities but consistently forwarded them to the CPA firm late, causing headaches for the firm and penalties for the client. To save everyone time and money, the CPA firm recommended that the client change the address on its tax return to the CPA firm's address. The client agreed.
Later, the CPA firm received an IRS audit notice requesting additional documentation about research and development credits reflected on the client's tax return. The CPA firm responded directly to the notice without consulting the client but did copy the client on the response. The IRS denied the credit, and the client sued the CPA firm asserting that the firm was not engaged to respond to the notice and should have forwarded it to the client instead.
WHAT ELSE COULD GO WRONG?
Permitting a client to use the CPA firm's address exposes the firm to other potential risks, including:
- A missed regulatory filing deadline, causing the client to incur fines, penalties, and, potentially, a loss of good standing with the state; and
- Reputational damage for the firm if a client's ability to conduct business is negatively impacted.
While permitting a client to use the CPA firm's address as its own may appear to be providing good client service, it can, instead, be problematic.
RISK MANAGEMENT CONSIDERATIONS
In the previous scenario, the firm should have insisted the client take responsibility for receiving and timely forwarding correspondence to the firm. Clients that do not accept accountability for simple tasks such as forwarding notices may present other risks, and the CPA firm should reevaluate the relationship if problems continue.
In the rare circumstance where the CPA decides to accept this type of engagement, consider the following tips for mitigating the risk of a professional liability claim.
Obtain an engagement letter
CPAs may consider a client's request to use the firm's address as an extension of existing professional services. This is not the case — it is a separate service, and a separate engagement letter should be obtained. Unique engagement letter provisions specific to this service include:
- Identification of primary and backup client contacts to which correspondence will be forwarded. Include at least two contact numbers and/oremail addresses for each individual in the engagement letter.
- Description of how the CPA firm will forward correspondence to the client whether personally, via certified mail, or through the use of a third-party delivery service. Also include how receipt will be acknowledged by the client and documented by the firm.
- A hold-harmless clause in the event that a notice received by the CPA firm and forwarded to the client results in damages because the client fails to timely respond.
- An indemnification clause that requires the client to defend and indemnify the CPA firm from third-party claims related to the client's untimely or absent response to such correspondence (e.g., claims from limited partners related to an IRS partnership audit).
- Engagement wrap-up procedures for removing the CPA firm's address from government records when the engagement or client relationship ends.
Establish notification procedures
Failure to timely forward correspondence to the client presents numerous risks to the client and the firm. Establish internal firm procedures to forward correspondence to the client quickly, preferably within 24 hours of receipt by the firm, to help mitigate this risk.
Do not respond to correspondence received — the client is the addressee, not the CPA firm. Even if the firm believes that the client will ultimately ask the firm to respond, the firm should consider whether it has been formally engaged to do so. If appropriate, the CPA may suggest additional services to assist the client with its response, which would necessitate a new engagement letter.
Document the firm's actions
A CPA firm's workpapers for this service should include the correspondence received, date received, date and to whom the correspondence is transmitted, and the transmittal method. The firm also should request a written acknowledgement from the client.
Consider registered agent services
A registered agent is a third party that is registered in the same state as a business entity and maintains a physical location in the same state in which the business entity operates. The registered agent receives official correspondence on behalf of the business entity, such as service-of-process notices, correspondence from the government, and notices of lawsuits.
While serving as an intermediary between the government and a client sounds easy, CPAs providing such services have been sued. Consider this scenario:
Unbeknownst to the CPA, a client named the firm as its registered agent with the Secretary of State. Some years elapsed, and the client decided to change CPA firms. One day, the original CPA firm received notice of a lawsuit for the now-former client. In an attempt to reconnect with the client, the CPA firm hand-delivered the notice to the former client.
Believing the lawsuit was meritless, the former client did not respond to the complaint until a multimillion-dollar default judgment was rendered against it. The former client informed the court that it had not received the original notice, which was its reason for the failure to respond. When this excuse was not accepted by the court, the client brought a claim against the CPA firm alleging it did not fulfill its duties as the registered agent. Because the CPA firm had not documented delivery of the notice to the former client, the firm was forced to defend itself, incurring substantial time and defense costs.
The same risks associated with allowing a client to use the CPA firm's address to receive correspondence also apply to CPAs serving as a client's registered agent. If asked to serve in this capacity, suggest the client engage a third-party registered agent service, many of which have locations throughout the country. These specialized service providers are affordable and may better align with a client's needs.
Finally, serving as a client's registered agent may not be covered under a professional liability insurance policy. Before agreeing to serve as a registered agent, review coverage with your professional liability insurance agent or broker. If these services are not covered, ask if it is possible to obtain an endorsement to the policy.
A FINAL NOTE
If you discover a client has listed your firm as its registered agent without your authorization, request in writing that the firm be removed as a registered agent. If the client fails to do so, you may want to reevaluate the client relationship.
Deborah K. Rood (firstname.lastname@example.org) is a risk control consulting director at CNA.
Continental Casualty Company, 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 cpai.com.
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.