Academic journal article Journal of Accountancy

Planning to Mitigate Risk in Tax Planning Engagements

Academic journal article Journal of Accountancy

Planning to Mitigate Risk in Tax Planning Engagements

Article excerpt

Do your clients request or, more likely, expect tax planning services beyond traditional tax compliance services? While tax planning may be rewarding and interesting work for many CPAs, these services also present professional liability risk. Often, the services involve identifying the client's personal financial goals so the CPA can design strategies and make specific recommendations that, when implemented, assist the client in achieving his or her goals. Many CPAs do not realize that the AICPA Statement on Standards in Personal Financial Planning Services (SSPFPS), in addition to the AICPA Statements on Standards for Tax Services (SSTSs), apply to such services.

A professional liability claim may occur if a client's expectation and the results of the tax and/or personal financial planning services do not coincide. Defense of this claim may be challenging if the firm did not comply with all applicable standards. Consider this scenario:

A CPA firm prepared tax returns for a family business and individual returns for family members. The business was owned by the father with his two sons holding a minority interest. Nearing retirement, the father wanted to transfer his share of the company to his children while retaining control of operations until he gained confidence in his sons. In addition, he wanted his grandchildren to benefit from his hard work in building the family business. The CPA firm partner recommended that the father gift his stock to a new trust and designate his sons and grandchildren as beneficiaries. The client's business attorney was not experienced in trusts and estate planning, so the client asked the partner for a referral. The partner referred an attorney whom he had met at a networking event, but had never worked with, to assist the client in implementing the CPA's plan.

Four years later, the sons, now in charge of the company's operations after their father's retirement, decided to sell the business to a private-equity firm for a substantial gain. In anticipation of the sale, the trustee distributed the company stock to the beneficiaries.

The following year, a new partner at the CPA firm with extensive trust and estate experience was asked to prepare the trust's tax return. The new partner concluded that the trust did not qualify as a generation-skipping trust and that a 40% generation-skipping transfer (GST) tax applied to the distribution. The father brought a claim against the CPA firm, asserting the firm, not the client, should pay the tax in addition to the applicable penalties and interest. He claimed that he would not have created the trust, transferred the stock to it, or been subject to the GST tax had it not been for the partner's advice. The CPA firm reported the claim to its professional liability insurer who hired a defense expert to review the validity of the claim. As a result of this review, several issues were noted that adversely impacted the defense of the claim.


Issue: When the advice was originally provided, neither the engagement partner nor anyone else at the CPA firm had sufficient experience in estate or gift planning.

Risk management tip: All CPAs must comply with the General Standards Rule of the AICPA Code of Professional Conduct (see ET [section]1.300.001), which requires CPAs to undertake only those professional services the CPA or the firm can reasonably expect to complete with professional competence. While this CPA firm was capable of preparing the corporate and individual income tax returns for the client, it did not have experience in estate planning and gift tax ramifications. The CPA firm should have recommended that the client consult with another CPA firm or an attorney experienced in estate planning, or required the partner to obtain competence through training and interaction with experts.


Issue: Clients may hold a CPA firm responsible for a negligent referral to another professional if the professional's work does not meet the client's expectations and the client suffers damages as a result. …

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