When a Client Owes a Surprise Billion to the IRS, It’s Time for an Accounting Professional Liability Lawsuit

When a Client Owes a Surprise Billion to the IRS, It’s Time for an Accounting Professional Liability Lawsuit

Tuesday, October 6, 2015/Categories: Errors and Omissions Insurance

According to a report by Crain's Detroit Business, heirs of Bill Davidson, the former owner of the Detroit Pistons basketball team, are suing Deloitte Tax LLP over an unexpected IRS bill – $2.7 billion, to be exact. Needless to say, the estate was not happy about that unpleasant surprise, so the report states they are suing the adviser to recover $500 million in taxes, fees, and penalties.

The lawsuit claims Deloitte Tax failed to:

  • Disclose the risks of the tax plan that it recommended to Davidson.
  • Appropriately manage Davidson's estate.
  • Properly estimate his holdings.

The report notes that the estate claims the adviser used Davidson as a portfolio showpiece to help generate more revenue for the firm, and in its haste to lock down his business, the firm failed to inform Davidson about the risks associated with the plan it pushed.

You don't need to mishandle a massive fortune to face a similar lawsuit (though that is a surefire way to end up in court. More on that in "3 Lessons from Celebrities’ Lawsuits Against their Accountants"). Any time you fail to disclose all the risks and payment obligations your client takes on when they choose a tax plan, you can be held liable for unanticipated penalties.

Avoid Tax Prep Lawsuits with Communication

If there's one thing this case clearly exemplifies, it's that things can get tricky when you're dealing with trusts and estates. Often, these clients rely solely on your expertise to manage their money and expect you to help them build wealth, not accrue more bills.

However, if you are diligent about upholding a professional standard of care, the plaintiff faces an uphill battle when they sue over your services. Not all tax errors give rise to actionable lawsuits. For example, the Journal of Accountancy states that taxes owed don't necessarily count as recoverable damages. However, some courts hold preparers and advisers liable for the taxpayers' penalties and interest for underpayment.

That's why full disclosure with your client is an absolute must every step of the way. Talk to your clients to make sure they…

  • Accurately report their assets.
  • Understand the risks that come with certain tax plans.
  • Sign off on any services you recommend.
  • Understand how much they owe in taxes.
  • Understand the scope of your services.

Always document your communication with clients in case your agreements are called into question later. For more tips on avoiding lawsuits, check out "6 Ways Accountants Can Prevent Malpractice Lawsuits."

Another Case for Accountant Professional Liability Insurance

Of course, even if you open all the channels of communication, document your correspondences, and give the best possible advice, a client may still sue. You simply can't control human behavior, especially when money is on the line.

That's why Professional Liability Insurance is such a necessary failsafe. If you are ever targeted by a lawsuit over your services, your policy may help cover…

  • Attorney fees.
  • Settlements.
  • Judgments.
  • Other court expenses.

Even if the lawsuit is frivolous, your coverage can still help pay for attorney fees, so long as you didn't do anything illegal. For more on that, read "Coverage Denial for Accounting Firm Shows the Limits of Professional Liability."

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