TaxCut wrote:I know we have E&O insurance for large penalties but are we responsible when the penalty is based on the amount due because clients don't do their part?
Absolutely not. Especially not if the penalty is due to the client's failure to act when you previously advised them to act or to make a payment and all of that is documented in writing.
My income tax compliance engagement letters are very clear that the client is responsible for payment of all penalties and interest associated with their tax returns.
If it is your fault, and the penalty is large, it's best to notify your insurance carrier.
I think our most regular exposure here is P&I for failure to pay estimated tax with an extension. For those reasons, I have become very clear with my clients each March that if they do not provide me adequate information, I am not able to calculate a ballpark extension payment. In those situation I will ask the client how much they want to pay and gently remind them that P&I accrues on any tax due that is not paid with the extension.
Also, I always frame extension payments I calculate as: "this is what I'm calculating based on the documents and assumptions that have been provided, but if you'd like to pay in a little more to build in a cushion and be conservative, you can." Most of my high earners don't bat an eye at paying a few thousand more with the extension to be safe.