Expert advice on defending tax and other claims

By Deborah K. Rood, CPA

Claims related to tax services are the most frequent type of claim asserted against CPA firms in the AICPA Professional Liability Insurance Program. Conrad Davis, CPA/CFF, CGMA, a partner at Crowe LLP, who provides tax expert testimony, and Janet Everson, J.D., LL.M., a partner at Murphy, Pearson, Bradley & Feeney, a law firm specializing in the defense of CPAs and other professionals, provide their advice to CPAs to help defend claims.

Based upon your experience, what makes a claim against a CPA challenging to defend?

Everson: A case involving issues of scope creep is always difficult to defend when the CPA does not have an engagement letter. These matters include claims of failure to prepare correct tax returns, failure to detect fraud, failure to give adequate planning advice, and other claims.

When a CPA's file does not contain written documentation of material issues or conversations relevant to the claims raised, vague billing entries compound the difficulty of mounting a viable defense.

Incomplete tax organizers can also make a viable defense more difficult to establish and allow for disputes of fact with respect to what information was provided to the preparer.

What can CPAs do to address these challenges?

Davis: If it isn't written down, then it is as if it didn't happen.

Document as much as possible. Documentation should include a summary of formal meetings, conversations, phone calls, and lunch meetings. Frequently, plaintiff attorneys allege that something was either discussed or concluded, but there is nothing in the file indicating such. Email can be an appropriate means for doing so. A note to the file is not as good but is more helpful than nothing.

Everson: While not a substitute for an engagement letter or other documentation, detailed billing descriptions may provide a valuable road map of the work performed, including evidence of conversations had and critical events.

When faced with a nonresponsive client, trust your instincts and consider disengaging. All too often a CPA is in a difficult situation due to a deadline, unpaid fees, and incomplete information.

Workpaper review is an important part of preparing to defend a CPA firm. What do you look for in tax engagement workpapers?

Davis: Workpapers should be robust, not in volume, but in clarity. This means there should be workpapers to support the returns and analysis performed. Nothing more, nothing less.

Everson: I like to see completed tax organizers. When a client is not responsive, I like to see evidence of the CPA's attempt to contact the client and then, if necessary, a disengagement or termination letter.

What do you not want to see in the CPA's workpapers?

Everson: There are several items I do not like seeing in files, including:

  • Personal emails intermixed with business emails, which may create the appearance of a lack of professionalism. It also provides opposing counsel with a platform to raise ethical issues, such as lack of objectivity, even if untrue.
  • Workpaper notes that suggest the CPA has deviated from the scope of services identified in an engagement letter.
  • Inappropriate response to the discovery of a potential error, including notes conceding to an error made by the firm or admitting fault. It is more difficult to argue that an error was not made if there is a concession of error, especially if such is done in writing. If an error is noted, the CPA should consult with the firm's professional liability insurer and, potentially, defense counsel before disclosure to the client. Client notification should be made after these consultations.

Davis: I do not like to see superfluous information that the CPA did not rely upon to prepare the return, such as monthly bank statements that were not used. If there are documents included in the workpapers, the assumption is that the CPA did something with them. Such extraneous information may be leveraged to imply that the CPA is responsible for those documents, even if they were not used. If the firm receives information that will not be used, do not include them in the workpapers retained.

Engagement letters are a useful tool in defending CPAs. What tips do you recommend related to engagement letters?

Everson: Most importantly, use engagement letters for all services, especially for noncompliance services such as tax audit representation, planning services, and tax consultations.

An engagement letter clearly stating that the information provided by the client will not be audited and that the CPA is not responsible for detecting fraud provides a strong argument in support of a CPA's defense that detecting theft or fraud is beyond the scope of the engagement.

I like to see a provision that any tax planning advice provided by the CPA may only be relied upon if it is in writing and made in response to the client's specific written request for advice. In other words, oral communications may not be relied upon.

Davis: My favorite two provisions are:

1. The client has the final responsibility for the accuracy of the information provided and reported to the taxing agency, and

2. The CPA is not responsible for detecting theft or fraud.

A claim may be avoided if the firm declines or terminates a client or engagement. Are there any warning signs to take note of?

Davis: I see problems arise with existing clients who undergo significant changes in ownership or operations. My experience is that during these times, the CPA may not be prepared to address these changes in taxes and other issues, or the new leadership may not be a good fit for the CPA firm.

Client reactions to fees and their responsibilities in the engagement are good indicators of how your client values the services and of a good client fit.

Similarly, if a client does not pay its fees timely or disputes the bill regularly, it may not be the right client for the firm.

Everson: Prospective clients with a history of changing CPAs, even with a plausible explanation, may represent warning signs of a risky client.

Clients who fail to return a signed engagement letter, a complete tax organizer, relevant information as requested, or pay for services in a timely manner also pose a higher risk to the CPA.

A common claim against CPA firms relates to the failure to detect a theft or fraud at the client, even for tax services. What should CPAs do to help their defense?

Everson: After including the engagement letter provisions I mentioned before, if a tax preparer becomes aware of a theft or fraud or is suspicious of such, the suspicious activity should be reported to management, the owner, or those with governance responsibilities. Document the conversation in order to minimize the risk of a later claim that the CPA aided and abetted the theft or fraud. It may be important to consult with defense counsel or the firm's professional liability insurer.

Davis: After using a strong engagement letter, I have found that a clear record of what was and wasn't reviewed by the CPA is important. Generally, the CPA does not obtain records that include the details of the fraud.

Deborah K. Rood, CPA, is a risk control consulting director at CNA. For more information about this article, contact

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

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. Quotations and comments provided reflect the individual's perspective and not that of their respective firm.

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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