Improper Tax Advice

Article Brief 1

Avoiding allegations of improper tax advice

Casual advice creates big exposure for malpractice claims

Bonita Smith

University of Maryland University College

March 10, 2013

Summary

This article summarizes the risks associated with providing casual advice to clients and provides suggestions to mitigate the risk of experiencing malpractice claims.

Casual advice is generally given regularly in the tax business, however, CPA’s or tax preparers should be extremely careful when given advice as facts. People or clients take advice as gospel and they run with the advice without researching what the accountant has told them or following up once they complete their tax return. For example, “A client mentions that he is considering selling a piece of real estate and that, if he did, a large taxable gain would result. The CPA indicates that if a like-kind exchange were completed, the gain could be deferred. The CPA then walks the client through the requirements of a Sec. 1031 exchange.

The following year, when compiling information to prepare the client’s tax return, the client mentions to the CPA that the like-kind exchange was completed and thanks the CPA for the advice. Unfortunately, while preparing the tax return, the CPA identifies that the exchange was completed more than 180 days after the sale of the exchanged property. As a result, the transaction does not qualify for deferral, and the client is required to pay tax on a gain that was not anticipated.”

From this incident alone professional liability claims have been made arising alleging that the client relied on the CPA’s advice in making the decision and that the tax would not be owed had the CPA not given the client “casual” information on how to defer the gain with a 1031 exchange.

“When discussing tax matters casually, ensure that anyone who is not a client understands that you are not providing tax advice, that you are speaking broadly and not to his or her specific...