Missed due dates: Diligence and the lurking danger

Client AB retains the services of YZ CPA to prepare a tax return. AB provides all information requested by YZ, YZ keeps a constant dialogue with AB about status and open items, and AB — completely unfamiliar with taxes — is wholly reliant on YZ. YZ botches the due date and the IRS assesses a penalty against AB. AB requests that the IRS abate the penalty, arguing its reliance on YZ is sufficient reasonable cause. The request is denied.

If this mundane fact pattern sounds vaguely familiar, it should. It mirrors Boyle, 469 U.S. 241 (1985). Although the professional in Boyle was an attorney, the Supreme Court in Boyle established the bright-line rule that “failure to make a timely filing of a tax return is not excused by the taxpayer’s reliance on an agent, and such reliance is not ‘reasonable cause’ for a late filing.” When a taxpayer cannot obtain penalty relief and must pay out-of-pocket, that same taxpayer may seek reimbursement from the professional they believe is responsible.

It is not breaking news to say that if your client misses a due date, any role you played in that miss will be front and center. Yet professional liability claims involving missed due dates are rising at head-scratching rates. Statistics from CNA, the endorsed underwriter of the AICPA Professional Liability Insurance Program, indicate that the share of tax claims involving a failure to timely file increased from 25% in 2022 to 37% in 2023.

At the same time, IRS civil enforcement is ramping up, and strong headwinds portend fewer penalty abatements. The warning is stark. When penalty relief for missed due dates is not forthcoming, the claim that blames the CPA for those penalties may very well be.

The simple response? Deploy some form of system that tracks and alerts you to due dates, respondby dates, and project status, often referred to as a docket system. However, a common refrain lately from CPAs who already have such a system is that one “slipped through the cracks.” Thus, the real solution requires you first to understand that key client details can get overwhelmed by the everyday, and then pause, reemphasize diligence, and seal your proverbial cracks.

DOCKET. UPDATE. REVIEW. REPEAT.

Many practitioners already understand and deploy some version of a docket system. This ranges from the humble spreadsheet to the full-bodied practice management suite that lists forms and due dates. Practitioners feverishly cross-check their system to make sure work that was supposed to be completed is completed. On time. Yet due dates continue to be missed. Why? The first clue is awareness — do you know the due date exists?

There are myriad statutory dates beyond annual, periodic compliance. Examples include estate tax returns, income tax returns for estates, and amended returns, especially where legislation has created a time-sensitive opportunity that previously did not exist, or where the original due date was postponed. There are also state and local tax withholding forms, and foreign withholding forms such as Forms 6166, Certification of U.S. Tax Residency, or 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons. And like-kind exchange dates and Sec. 83(b), Sec. 754, passthrough entity tax, or passive foreign investment company elections. In M&A transactions, the seller’s tax year may end on the last day of the month, the last day of the year, or some other date. There may also be entities formed in the deal that disappear as quickly as they are created. The list goes on.

The point is this: Like any tool, your system’s ability to properly function is only as good as your interaction with it. If accurate information is not identified and placed in the system, it will not work. Your system’s precision is a reflection of how quickly and accurately you grasp the importance of information received, and how diligently you act upon it to get it into the system. Diligence, in the context of the everyday, is a distinct challenge for two reasons:

• Diligence requires combined energy and focus, both of which are not always available on demand; and
• Few things in day-to-day work truly stand out and force you to stop and reckon with them to the exclusion of everything else.

The crucible of the quotidian?

The second clue to why due dates are missed is the bane and reality of work: interruption. If you run a business, you are constantly bombarded by phone calls, staff interruptions, emails, digital interruptions, and other interruptions. This truth creates what is referred to as threats lurking in the crucible of the quotidian. As professors Karl Weick and Kathleen Sutcliffe explain in Managing the Unexpected (3d. Edition, 2015):

the “quotidian” refers to events that are commonplace, everyday, and recurring . . . Calling the everyday a “crucible” clarifies that those events are a recurring test filled with interruptions and recoveries that can fan out in unintended directions. Operations that we do every day are basically a bet that things that could go wrong won’t go wrong. But the actual outcome of that wager depends on how attentive we are to real-time, here-and-now activities. [Emphasis added]

At its core, the essential question is, how do you process things that “normally” happen, blend into the noise, but would scream, “WARNING: I require special attention!” if things were less chaotic?

Most CPAs are intimately familiar with receiving information, intuitively knowing exactly what needs to be done to avoid a problem, starting to do what needs to be done . . . and getting interrupted. The start-stop-start dynamic to our experience of “work” is so familiar that it feels, well, quotidian. And yet the difficulties associated with mentally picking up a task where you left off prior to the interruption are well researched and documented. The lurking danger is that each day, several times a day, CPAs make bets that they won’t miss something that later reveals itself to be more important than they treated it at the time. They bet that if they do miss something important, it won’t come back to bite them, or that if it does bite them, they can remediate it at minimal cost and downside. Increasingly, CPAs are losing those bets. Claim statistics back this up. A resurgent IRS appears to be making the odds on those bets longer.

What can I do? Stop. Prioritize. Be diligent.

Full circle back to the central question — how to avoid the claim from a missed due date at a time when the risk of that claim is increasing. The short but hard answer is to stop and prioritize. Your docket system cannot do it alone. Even one with (literal) bells and whistles cannot update itself. Someone with sufficient competence must cut through the noise and act accordingly.

Administrative staff and junior team members can help if they are extensions of you, not merely extensions of a tool. You must make clear to them the downsides associated with missed due dates — penalties, potential claims, reputational damage — and educate them on what to look for. Diligence (intentional and persistent effort), and vigilance (being attentive and alert) are both critical elements to the successful function of any docket system. And this truly is the hard part because both require time and energy. If we’re honest, sometimes it also requires a little bit of luck.

The multitude of due dates is not going away and neither will the interruptions. In reality, it is often not just one but several interruptions. At that point, the relative volume on the first siren has decreased when compared to the siren announcing the next emergency. Competing client interests and interruptions are an inescapable part of the everyday.

However, missing due dates in many cases is avoidable. It starts with diligence.

-52%: In FY23, the IRS abated civil penalties at a rate of 10.2% (45,545,154 assessed; 4,664,075 abated), a decrease of 52% compared to FY22, when civil penalties were abated at a rate of 21.3% (39,898,114 assessed; 8,510,272 abated). 

Sources: IRS 2023 Data Book and IRS 2022 Data Book.

J. Michael Reese, J.D., LL.M., is a risk consulting director at CNA. For more information about this article, contact specialtyriskcontrol@cna.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 without notice.