Individuals who retain professionals to prepare their tax returns expect knowledge and expertise from them. In an ideal world, taxpayers want clean returns that will not attract IRS scrutiny or additional tax, interest, or penalties. But accountants harbor certain expectations about their clients as well; in particular, tax professionals want client-supplied information to be accurate, complete, and substantiated. Furthermore, they want their clients to be diligent and timely in fulfilling their tax return submission responsibilities. in light of these mutual expectations, this analysis discusses the ability of accountants to defend against professional malpractice suits using a comparative negligence defense.
The following is an overview of this legal defense and its evolution in the field of accounting malpractice. It also examines how the comparative negligence defense can apply in the context of tax return preparation and tax planning in general. CPAs should familiarize themselves with the strategies below in order to enhance the effectiveness of this line of defense.
When a client sues an accountant for malpractice, there are generally two different theories that may underlie the client's cause of action. The more common theory rests in negligence. Most courts will characterize malpractice claims as asserting a negligence claim, unless the defendant has undertaken to achieve a specific result; accordingly, most claims are subject to the comparative negligence defense. To establish negligence, an aggrieved client must demonstrate satisfaction of the following four elements (George Spellmire and Debra Winiarski, Accounting, Auditing, and Financial Malpractice, ch.l, section 1.03, 1998):
* The accountant owed a duty to the client.
* In carrying out that duty, the accountant breached the standard of care.
* This breach of the standard of care was the proximate cause of the injury.
* The client suffered damages.
Alternatively, some states permit clients to sue their accountants for breach of contract To establish a breach of contract, an aggrieved client must demonstrate satisfaction of the following four elements (Spellmire and Winiarski, ch. 1, section 1.05):
* A contract existed.
* The plaintiff complied with its own obligation under the contract.
* The defendant breached the terms of the contract.
* Damages resulted from the breach, and those damages were foreseeable at the time the contract was made.
The cause of action that the client seeks to advance, or that is available in the state in which the malpractice incident allegedly occurred, can have important repercussions. Among other things, negligence and breach of contract actions can carry different statutes of limitations, issues of privity, and measures of damage. A plaintiffs choice of action might also limit accountants' available lines of defense; in a contract action, for example, the invocation of comparative negligence is typically unavailable.
The historical antecedent to comparative negligence is contributory negligence, which is defined as follows: "A plaintiffs own negligence that played a part in causing the plaintiffs injury and that is significant enough (in a few jurisdictions) to bar the plaintiff from recovering damages" Black's Law Dictionary, 8th ed., 2004). By way of comparison, that same edition of Black's Law Dictionary defines comparative negligence as follows: "A plaintiffs own negligence that proportionally reduces the damages recoverable from a defendant." For reasons of equity, most states have passed legislation endorsing the use of the comparative negligence defense, supplanting the contributory negligence defense (see http://www. mwl-law.com/PracticeAreas/ContributoryNeglegence.asp).
When contributory negligence dominated the legal landscape, courts attempted to ameliorate the all-or-nothing nature of this legal doctrine. This was particularly true when it came to accounting malpractice cases that involved auditing, epitomized in National Surety Corp. …