Are Negligent Tax Preparers Liable for Interest Paid to the IRS?

Source: The CPA Journal

When a client prevails in a lawsuit against a tax preparer for negligent tax advice, can it recover the interest charges imposed on unpaid taxes? As this article explains, the majority of courts say yes, reasoning that a plaintiff should be able to recover costs that flow directly from the tax preparer's negligence and that would not otherwise have been owed.

The minority view – as expressed by the U.S. District Court for the Eastern District of California in Eckert Cold Storage, Inc. v. Behl – denies recovery of interest under the theory that it “represents a payment for the plaintiffs' use of the tax money during the period after the taxes came due and before they were paid . . . .”

A few states have adopted a hybrid approach: They generally permit plaintiffs to recover interest in tax preparer malpractice cases. But to avoid a windfall to the plaintiff, they allow the defendant to introduce evidence that the plaintiff subjectively benefited from use of the money.

The authors encourage attorneys representing tax preparers to advocate for wider acceptance of the minority view and to consider engaging expert witnesses to quantify the benefits enjoyed by plaintiffs from use of unpaid taxes. They also admonish tax preparers to avoid making any representations to clients regarding their responsibility for interest assessed in an IRS audit.

For the complete article, read “Tax Preparers' Liability for Incurred Interest Charges.”

From The CPA Journal, A Publication of the New York State Society of CPAs, February 2012, www.cpajournal.com.