An Accounting Firm Gets Sued

I just saw that Baker Tilly has acquired Seiler LLP, a CPA firm located in San Francisco and practicing for well over half a century.

There is nothing unusual here. Many older CPAs are looking to retire. In some cases, the firm may have planned for transition and brought in, developed, and retained a pipeline of ownership-interested younger CPAs.  The older CPAs retire, the younger CPAs step up and the firm continues.

In other cases, there is no such pipeline, and the older CPA’s exit plan is a sale to another firm.

The matter caught my eye because a client is suing Seiler for negligence. The matter is still in court. I thought the grounds for negligence was … different.

It is not our usual brew of java, but let’s talk about it.

It starts with a married couple: Eric Freidenrich and Amy Macartney. They hired Seiler to prepare their 2019 joint tax return. The return was filed in December 2020.

COMMENT: You may be thinking that the return was filed late (that is, after October 15) and penalties and interest would be due. That is not true here, as the return showed an overpayment of almost $450 grand. There normally will be no interest and penalties on refund-due returns, as penalties and refunds normally apply only when balances are due the IRS. The risk to a refund return is waiting too long to file a return. Remember, the statute of limitations on filing is three years. Wait past those three years and you will lose your refund.

For some reason, Eric and Amy did not use a home address on their return. They instead used their financial advisor’s address, a practice they had followed for years.

Now, a couple of things happened after 2019 and during 2020 before Seiler filed the return:

·       Eric and Amy divorced.

·       The financial advisor moved.

On first blush, I would be concerned about the divorce. A CPA (or his/her firm) should think long and hard about representing a divorcing couple. The reason is simple: which one of the two is the client? Representing both can create a conflict of interest, and a CPA is supposed to maintain independence and avoid such conflicts. Failure to do so can result in a hearing before a State Board of Accountancy.

The refund arrived in April 2022.

The two had signed their separation agreement in June 2021.

The separation agreement included language that Eric would be responsible for additional taxes due during the term of marriage, but - to be fair - he would also be entitled to any refunds.

Amy did not know that the IRS refund got held up. The couple’s routine was to deposit in the couple’s Fidelity account, and the separation agreement had Amy receiving 60% of the Fidelity account.

The refund was almost $450 grand, and 60% of that – approximately $270 grand – would have gone to Amy.

She was not amused.

I would not be either.

She sued Seiler for negligence.

Notice that she did not sue her ex-husband.

Where is the negligence?

Seiler – as a firm – knew that that advisor had moved. It should have used the new address.

Did the tax team – a subset of Seiler – also know that the advisor had moved? Information moves well enough in a CPA firm, but it would be false to say that it moves flawlessly. It is possible that the tax department did not know, but Amy is suing Seiler, not the tax department.

Seiler (or rather, their attorney) tried to get the motion dismissed.

And there is a quick lesson here about torts. Torts are civil law. Think of torts as suing someone. You bring suit, not the government. It is conduct between private parties.

The idea behind a tort is to restore the injured party (as much as possible in the circumstance) to where he/she would have been had the other party not acted or failed to act. A goal of tort law is to see the world as it could have been, not as the world is now.

Well, under that description Amy would have received 60% of the IRS refund. Seiler injured her. Her ex did not injure her, as he stated in the divorce decree that he would keep any tax refunds relating to the marriage term.

The Court therefore saw reason for tort action and would not grant summary motion for dismissal.

What does this mean? It means that the Court will hear the case against Seiler for negligence.

As a tax CPA, it bothers me that I could get my firm sued for something I did not even know. That said, I get it. The firm knew. However, Eric and Amy saw the address on the return. Their attorneys would also have seen the address. Do we know if the financial advisor timely filed a change of address with the IRS? Seiler might not be the only party with some measure of fault. 

Incompetent Employees And IRS Penalties

 

“Taxes are what we pay for civilized society.” Compania General De Tabacos de Filipinas v. Collector, 275 U.S. 87, 100 (1927) (Taft, C.J.). For good reason, there are few lawful justifications for failing to pay one's taxes. Plaintiff All Stacked Up Masonry, Inc. (“All Stacked Up”), a corporation, believes it has such an excuse. It brings this suit to challenge penalties and interest assessed by the Internal Revenue Service (“IRS”) following its failure to file the appropriate payroll tax documents and its failure to timely pay payroll tax liabilities for multiple tax periods.

The above is how the Court decision starts.

Here are the facts from 30,000 feet.

·      The company provides masonry services.

·      The company got into payroll tax issues from 2013 through 2015.

·      The company paid over $95 thousand in penalties and interest.

·      It now wanted that money back. To do so it had to present reasonable cause for how it got into this mess in the first place.

Proving reasonable cause is not easy, as the IRS keeps shrinking the universe of reasonable cause.  An example is an accountant missing a timely extension. There is a case out there called Boyle, and the case divides an accountant’s services into two broad camps:

·      Advice on technical issues, and

·      Stuff a monkey could do.

Let’s say that CTG Galactic Command is planning a corporate reorganization and we blow a step, causing significant tax due. Reliance on us as your advisors will probably constitute reasonable cause, as the transaction under consideration was complex and required specialized expertise. Let’s say however that we fail to extend the corporate return – or we file it two days after its extended due date. Boyle stands for the position that anyone can google when the return was due, meaning that relying on us as your tax advisors to comply with your filing deadline is not reasonable.

As a practitioner, I have very little patience with Boyle. We prepare well over a thousand individual tax returns, not to mention business, nonprofit, payroll, sales tax, paper airplanes and everything in between. Visit this office during the last few days before April 15th, for example, and you can feel the tension like the hum from an electrical transformer. What returns are finished? What returns are only missing an item or two and can hopefully be finished? What returns cannot possibly be finished? Do we have enough information to make an educated guess at tax due? Who is calling the client?  Who is tracking and recording all this to be sure that nothing is overlooked? Why do we do this to ourselves?

Yeah, mistakes happen in practice. Boyle just doesn’t care. Boyle holds practitioners to a standard that the IRS itself cannot rise to. I have several files in my office just waiting, because the IRS DOES NOT KNOW WHAT TO DO. I brought in the Taxpayer Advocate recently because IRS Kansas City botched a client. We filed an amended return in response to a Notice of Deficiency the client did not inform us about. The amended must have appeared as “too much work” to some IRS employee, and we were informed that Kansas City inexplicably closed the file. This act occurred well before but was fortuitously masked by subsequent COVID issues. The after-effects were breathtaking, with lien notices, our requests for releases, telephone calls with IRS attorneys, Collection’s laughable insistence on a payment plan, and – ultimately – a delay on the client’s refinancing. IRS incompetence cumulatively cost me the better part of a day’s work. Considering what I do for a living, that is time and money I cannot get back

I should be able to bill the IRS for wasting my time over stuff a monkey could do.

The Advocate did a good job, by the way.

Let’s get back to All Stacked Up, the company whose payroll issues we were discussing.

The owner fell on ice and suffered significant injuries. This led to the owner relying on an employee for tax compliance. That reliance was misplaced.

·      The first two quarterly payroll returns for 2013 were filed late.

·      The fourth quarter, 2013 return would have been due January 31, 2014. It was not filed until July 13, 2015.

·      None of the 2014 quarterly returns were filed until the summer of 2015.

·      To complete this sound track, the payroll tax deposits were no timelier than the filing of the returns themselves.

Frankly, the company should just have let its CPA firm take care of the matter. Had the firm botched the work this badly, at least the company would have a possible malpractice lawsuit.

The company pleaded reasonable cause. The owner was injured and tried to delegate the tax duties to someone during his absence. Granted, it did not go well, but that does mean that the owner did not try to behave as a prudent business person.

I get the argument. All Stacked Up is not Apple or Microsoft, with acres and acres of lawyers and accountants. They did the best they could with the (clearly limited) resources they had.

The company appealed the penalties. IRS Appeals was willing to compromise – but only a bit. Appeals would abate 16.66% of the penalties and related interest. This presented a tough call: accept the abatement or go for it all.

The company went for it all.

Here is the Court:

Applying Boyle to this case, it is clear as a matter of law that retention of an employee or software to prepare and remit tax filings, make required deposits, and tender payments cannot, in itself, constitute “reasonable cause” for All Stacked Up’s failure to satisfy those tax obligations. The employee’s failures are All Stacked Up’s failures, no matter how prudent the delegation of those duties may have been.”

And there is full Boyle: we don’t care about your problems and you doing your best with the resources available. Your standard is perfection, and do not ask whether we hold ourselves to the same standard.

I wonder if that employee is still there.

I mean the one at IRS Kansas City.

Our case this time was All Stacked Up v U.S., 2020 PTC 340 (Fed Cl 2020).