What kinds of tax services result in the most expensive claims?

Video transcript:

So the good news is even though there’s more tax claims than all other claims combined, most of them are not severe. And, like you said, severe means expensive in terms of cost to defend and actual payouts to the plaintiffs. So most tax claims are not that severe, but there are four instances where they can get pretty severe. Number one is when the claim involves foreign filings. Take a missed FBAR [FinCEN Form 114, Report of Foreign Bank and Financial Accounts]. Penalties start at $10,000, but can be 50% of the highest value of the account per year. So if you’ve got a million-dollar account and you haven’t reported it for three years, you’ve got a million-and-half-dollar claim, which in my book is a pretty severe claim. So foreign stuff. Number two: state and local filings, and here there’s really two areas where it comes in. Number one is you don’t advise a client to file in another state; state comes in and says you need to file for seven years. You file for the seven years and you go back and amend the home state return, but you can only amend for three years. So the client is paying double tax for four years and comes back to the CPA and says, “You shouldn’t have told us that. You should have told us we should have been doing that, and because we paid tax twice, we’re not going to pay tax twice, you pay tax twice.”

The other area in state and local has to do with sales tax. Another failure-to-advise-type claim where the client comes and says, “CPA, you didn’t tell me I should collect and remit in another state. So now I can’t go back to my clients and get the money to pay this sales tax, so CPA you should file it because you failed to advise me.” Number three has to do with estate, gift, trust, and fiduciary services where you’re providing these services. So, first of all, when you’re talking estate, gift, trust, fiduciary, you’re talking clients with money — and clients with money, when they generally feel that when something goes wrong, somebody should be liable. And these are complicated returns that have a lot of complicated stuff in them, so what we see here a lot is dabblers, where people don’t know all the elections, and in retrospect somebody comes in and says you should have done something differently. So number four is with theft and fraud claims because when you’re providing tax services, and the more you’re into a client, if you’re providing tax and bookkeeping and client accounting services — if a theft or fraud occurs, the client is very likely to come back and say, “Deb, why didn’t you tell me I didn’t have internal controls? If you would’ve told me, I would have changed something, so now you should be responsible for that theft and fraud claim.” So really there’s four areas where claims get severe: one, when foreign — there’s foreign assets; number two, state and local returns; number three, estate, gift, trust, and fiduciary services; and number four, with theft and fraud claims.


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