A CPA's job would be so much easier if clients would just respond in a timely manner. In addition to creating unnecessary stress for CPAs, clients who fail to respond timely increase a CPA firm's professional liability risk. Let's walk through some of the ways CPAs have addressed unresponsive clients, the risks associated with those actions, and what may be a better path.
The client is too busy to respond to questions in a timely manner
In an effort to complete the tax return in a timely and cost-effective manner, the CPA makes decisions related to positions taken on the return without the client's involvement or authorization.
The risk: The CPA's decision may not be the best option for the client in light of all information. For example, a CPA prepared a newly married couple's tax return using the married-filing-jointly tax status. Several years later, the wife's application for student loan forgiveness was denied because her tax returns reported too much income. A claim was made against the CPA for the unforgiven loans because, if the wife had filed a separate return using married-filing-separately status and only her income had been reported on her return, the loans would have been forgiven.
While damages were not astronomical in this case, they may be significant when the CPA makes decisions about elections or the tax treatment of significant items.
A better response: First, be alert for situations where a significant decision requiring the client's input may need to be made. Many CPAs make these decisions without realizing their potential adverse impact. Ask how the decision contemplated could be detrimental to the client.
Once the situation is identified, include the client in the decision-making process. Explain the options to the client, including the benefits and risks of each option. Document the client's decision in writing, including their rationale, if known. If applicable, an email confirming a discussion would suffice. Clients' memories are short, and, if questions arise later, contemporaneous documentation serves as evidence of the client's decision.
Client documentation is received piecemeal and/or close to the filing deadline
To help avoid inefficiency, CPAs may wait until all of the client's information is received before starting to prepare and/or review the tax return.
The risk: There may be insufficient time to thoroughly review the tax return prior to filing, leading to an unidentified error. In other situations, additional information needed from the client is identified but may not be available before the due date of the tax return.
A better response: Proactively work with clients, especially those known to be perennial procrastinators, to receive information well before due dates. Include the date information must be received by the CPA from the client in the engagement letter. Consider using software that automatically sends text messages or emails to remind clients about missing information. Some clients may be incentivized to be more timely if they are presented with an early bird discount on fees.
When information is received, review it as soon as possible to identify missing information, and communicate this to the client in writing. Include a date when the additional information is needed. Follow up in writing if the information is not timely received.
Despite the CPA's best efforts, it is likely some clients will be unable to provide all information in a timely manner. For instance, a hedge fund's Schedule K-1 may not be received until close to the deadline. To reduce the risk of an error on the tax return in this circumstance, prepare and review the return after most information is received. The partially prepared tax return can be reviewed before the stress and exhaustion of an approaching deadline is at its zenith and mistakes are more likely. When the final information is received, the CPA can focus on the new information rather than the entire return.
The client's books are messy, and the client lacks the time, inclination, or skills to 'clean them up'
The CPA reconciles bank accounts and performs other bookkeeping services without the client's authorization.
The risk: In addition to risking uncollectible fees for additional services not approved by the client, CPAs may face claims of failing to detect a theft or fraud at the client organization. Why? If a theft or fraud later is detected at the client's business, the client may assert that the CPA, when reviewing the client's bank statements, should have spotted unusual transactions or pointed out other red flags to the client. The CPA's actions related to the bank statements, especially when combined with the lack of an engagement letter describing the limitations of the services, can be detrimental in defense of a subsequent claim.
A better response: Obtain a detailed engagement letter specifically identifying the scope of the services to be provided and the limitations of such services. Specifically state in the engagement letter that the CPA has no responsibility to detect theft or fraud and that any ancillary bookkeeping services provided are solely for the purposes of tax return preparation. Don't forget to include the firm's billing terms in the engagement letter, including that additional fees may be necessary if the client's books and records are not complete.
Despite numerous attempts by the CPA to make contact, a prior-year client has not contacted the CPA about their current-year tax return
Faced with an AWOL client but wanting to ensure the client doesn't face a late-filing penalty, some CPAs may file a zero extension for the client.
The risk: If the client has not contacted the CPA, has the CPA been engaged to prepare the current-year tax return? Arguably, the answer is "no."
By filing an extension without client authorization, the CPA may take away the taxpayer's reasonable-cause defense for penalty abatement. In one situation, the CPA extended the tax return for a perpetually unresponsive client. This proved problematic when a successor CPA requested penalty abatement for reasonable cause because the client did not understand a tax return was required. The IRS argued that the initial extension indicated that the client understood there was a filing requirement, and the Service rejected the abatement request.
Finally, the CPA may be subject to an Internal Revenue Code Sec. 7216 penalty for the unauthorized disclosure or use of taxpayer information. This penalty can be up to a $1,000 fine or up to one year of imprisonment, or both, for each violation.
A better response: Document your attempts to contact the missing-in-action client, especially for clients with filing obligations related to foreign investments, as the penalties can be severe. If the client does not respond, do not extend the tax return. Even for current clients and clients who have historically filed an extension, do not do so until you receive the client's written permission.
If a client is chronically unresponsive and it appears that the CPA cares more about filing a timely tax return than the client, it might be better to part ways. For tips on how to do so, read "Professional Liability Spotlight: Take a Hike: Ending Client Relationships," JofA, Feb. 2017. CPAs have options — they can manage their clients or let their clients manage them.
Deborah K. Rood, CPA, is a risk control consulting director at CNA. For more information about this article, contact email@example.com.
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 withoutnotice.