What is standard practice for when a client gets penalties?

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#1
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I am starting my own firm but need to familiarize myself more with the actual business practice/management portion of it. I will have an E&O provider before I begin any work, but was just curious as to what the general 'standard' is.

Are there instances where I would be liable for a clients penalties? I assume this situation would arise if I was grossly negligent to some degree and prepared the return incorrectly leading to penalty.
 

#2
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ChrisGCPA wrote:Are there instances where I would be liable for a clients penalties? I assume this situation would arise if I was grossly negligent to some degree and prepared the return incorrectly leading to penalty.


Of course, that's why we carry E&O insurance.

I wouldn't think it has to be gross negligence on the preparer/s / tax advisor's part.

What about if you did SALY for the extension and didn't ask for current year docs? Client files October 15th and has FTP penalty and interest. Client says: "I would have made a payment with the extension if you would have asked me."

The best thing you can do to mitigate the risk that penalty assessed to a client is "your fault" is to shift the liability. i.e. advise the client of risks in writing, make sure they understand all of the dynamics, and file it away. Any tax position on their return should be their decision, after weighing your advice.
 

#3
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ManVsTax wrote:
ChrisGCPA wrote:Are there instances where I would be liable for a clients penalties? I assume this situation would arise if I was grossly negligent to some degree and prepared the return incorrectly leading to penalty.


Of course, that's why we carry E&O insurance.

I wouldn't think it has to be gross negligence on the preparer/s / tax advisor's part.

What about if you did SALY for the extension and didn't ask for current year docs? Client files October 15th and has FTP penalty and interest. Client says: "I would have made a payment with the extension if you would have asked me."

The best thing you can do to mitigate the risk that penalty assessed to a client is "your fault" is to shift the liability. i.e. advise the client of risks in writing, make sure they understand all of the dynamics, and file it away. Any tax position on their return should be their decision, after weighing your advice.


I see, yes that is a fair example. I will certainly discuss this with my E&O provider, just wanted to get some input beforehand.
 

#4
ATSMAN  
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Before you file any extension, you NEED to know the client's tax situation especially if they pay estimated taxes.

I have a rule when a client asks me to file an extension:

1) Have you deposited the estimated taxes that we calculated on time.

2) Based on the preliminary P/L will you more than likely be a balance due return.

3) Make a written recommendation to deposit an additional payment to make sure the return is a refund return and not a balance due return. If they ignore my advice (some do), it is on them. I explain to them the penalties and make sure it is understood who will pay if they ignore my recommendation.

I DO NOT file an extension for a brand new (possible client) who comes in late and I may not have had a chance to go over the entire tax situation. Believe me the last week of tax filing, all I get is requests to file extensions.
 

#5
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Your E&O carrier may very well have some engagement letters written by their vast team of lawyers that covers many of the concerns you will encounter. I know mine provides a ton of different engagement letters, from sweet and short to very lengthy--and they do a fantastic job of shifting the burden to clients. Effectively, I am liable for poor advice and not much more (inluding per tax code).

Keep one thing in mind--we can be held liable for tax penalties and interest, but a client is ALWAYS responsible for the tax liability.

Also, extensions, since they have been referenced, are a nondelegable duty--it rests solely on the TP to ensure they are filed if one is needed, and that proper payments are made. If they do not inform me of such, it all falls on them. And it is in the engagement letters they have to sign, which simultaneously obtains permission for extensions if needed. I used to say any client bringing in work 30 days prior to a deadline would be extended, but I think I am pushing that out to 45 days and it is their responsibility to communicate to me all tax matters that may result in balances due upon filing the extensions.
 

#6
jon  
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+Engagement letter usually states what when extensions are required.
 

#7
Joanmcq  
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Basically, I will pay the penalties if I made the mistake. Like I left a stock sale off the return, I’ll pay. If the client didn’t give me a 1099, they’re paying.
 


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