Opinion Penalty?


D

Dick Adams

Taxpayer is approached with an investment opportunity
that has significant tax benefits. Being a prudent
person, taxpayer goes to CPA for advice. CPA reads
the investment literature and agrees the benefits do
exist. Being both smart and prudent, taxpayer asks
and gets a written opinion from the CPA.

Taxpayer is audited; CPA's opinion is best categorized
as incompetent. But taxpayer avoids penalties because
he has the written opinion.

The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?
 
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F

Frederick Jorden

Dick said:
Taxpayer is approached with an investment opportunity
that has significant tax benefits. Being a prudent
person, taxpayer goes to CPA for advice. CPA reads
the investment literature and agrees the benefits do
exist. Being both smart and prudent, taxpayer asks
and gets a written opinion from the CPA.

Taxpayer is audited; CPA's opinion is best categorized
as incompetent. But taxpayer avoids penalties because
he has the written opinion.

The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?
That depends on how big the firm is.
 
M

Michael T Wing CPA

Dick Adams said:
The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?
No doubt there are sanctions under Circular 230 that might apply.
Also possibly via the applicable State Board.

But what is the objective? To "punish" the preparer? Or to
recover damages in a malpractice action?

MTW
 
E

Ed Zollars, CPA

Dick said:
The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?
Officially, there would likely be issues potentially both
with Circular 230 (which would apply to attorneys and EAs as
well) and a professional ethics violation for a CPA for
accepting an engagement for which the CPA did not have or
obtain adequate professional competence.

In the first case, the facts would likely be important.
Simple incompetence may not create a Circular 230
violation--I'd have to do some digging there. However, if
it appears there was reckless disregard for looking into the
facts and the CPA merely wanted to collect a fee, there's
more likely a problem. I suspect that if the IRS suspected
that, it's more likely they would have balked at letting the
client get out of penalties because they would have presumed
the client would have been aware that this was a "pay me a
fee, I'll give you a letter" engagement.

In the second case, the problem would be getting the client
to file a complaint. As it was, the client did get an
opinion that "worked" for their purposes--it served as a
valid "shield" from the penalties. Without a complaining
client, it will be difficult to convince a state agency to
take any action. However, theoretically the case here would
be a lot easier to prove against the CPA.
 
D

DonTheCPA

Dick Adams said:
The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?
YES - Contact the state board of accountancy in the state
where the CPA practices. You may also want to provide your
information to that state's Society of CPAs "Peer Review
program".

JUST CURIOUS --- Was that CPA one that you were currently
doing business with? Specifically, was he currently
preparing your individual income tax returns? Did the seller
of the tax shelter (I ASS-U-ME that is what it was) provide
you with an opinion of any CPA who has given "him" such a
letter on the tax shelter itself?

Without providing the name or even city of the CPA, would
you please post here the written opinion your CPA gave to
you? I am curious as to "exactly" what your CPA did
gurarantee to you. I will then consult with a couple of
members of "my" state board just to get their general
reaction.
 
D

D. Stussy

Dick said:
Taxpayer is approached with an investment opportunity
that has significant tax benefits. Being a prudent
person, taxpayer goes to CPA for advice. CPA reads
the investment literature and agrees the benefits do
exist. Being both smart and prudent, taxpayer asks
and gets a written opinion from the CPA.

Taxpayer is audited; CPA's opinion is best categorized
as incompetent. But taxpayer avoids penalties because
he has the written opinion.

The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?
Only for tax shelters - and the above arrangement sounds
like it could be one.... Whether or not IRC 6700(a)(2) can
be imposed here I leave "as an exercise for the reader."
:)
 
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S

S. L. Richardson

Dick Adams said:
Taxpayer is approached with an investment opportunity
that has significant tax benefits. Being a prudent
person, taxpayer goes to CPA for advice. CPA reads
the investment literature and agrees the benefits do
exist. Being both smart and prudent, taxpayer asks
and gets a written opinion from the CPA.

Taxpayer is audited; CPA's opinion is best categorized
as incompetent. But taxpayer avoids penalties because
he has the written opinion.

The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?

Hard to get a malpractice suit going without any actual
damage. Is the tax paid on examination "damage?" Is it a
damage if he should've paid it (apparently) all along?
Don't know the answer to that question. Maybe some lurking
trial lawyer can tell us that.

Is there anything in Circular 230 (governs practice before
the IRS generally) that might address
misleading/incompetence?

Just random thoughts - not sure if much help.

Jason Richardson
Attorney, CPA
Sherman, Texas
I am not your lawyer, nor am I your accountant, etc....
 
S

Stuart O. Bronstein

Dick Adams said:
Taxpayer is approached with an investment opportunity
that has significant tax benefits. Being a prudent
person, taxpayer goes to CPA for advice. CPA reads
the investment literature and agrees the benefits do
exist. Being both smart and prudent, taxpayer asks
and gets a written opinion from the CPA.

Taxpayer is audited; CPA's opinion is best categorized
as incompetent. But taxpayer avoids penalties because
he has the written opinion.

The question is: Are there sanctions/penalties for CPA's
issuing incompetent tax opinions?
Possible, depending on the federal circuit you're in.

At one time I worked with a law firm based in Chicago, that
got in trouble for exactly this kind of thing. The advice
they gave a client was, "There's a reasonable basis to take
the deduction. But if it goes to court we are likely to
lose." That wasn't even in a written opinion.

This was considered tax fraud, unprotected by the First
Amendment, and one lawyer was actually convicted.

If you want to avoid problems when giving an opinion like
this, be very careful, look at both sides and reveal both
the pros and the cons. You shouldn't get in trouble merely
for being wrong. So show that you put some thought into it
and come up with what seems to be a reasonable conclusion.

Stu
 
D

Dick Adams

Hard to get a malpractice suit going without any actual
damage. Is the tax paid on examination "damage?" Is it a
damage if he should've paid it (apparently) all along?
Don't know the answer to that question. Maybe some lurking
trial lawyer can tell us that.
My reason for asking the above question is that a financial
adviser told me he had an opinion from a CPA on investing an
IRA in a closely-held business. The opinion stated that
there would be no IRA related penalties. This was over a
year ago and I simply dismissed it as not worth my time to
continue the conversation.

Recently I read a statement on this newsgroup and said to
myself "Would he put that in writing for a client?" That
triggered my recollection and caused me to wonder what the
IRS could do to the signator if a taxpayer produced such an
opinion.

Like I write an opinion that says "Yes, you & your shackjob
can each file HoH. You take the 1 yr old and the 3 yr old
and let him claim the 5 yr old and the 7 yr old." Not only
is that nonsense, but it is advising someone to play the
audit lottery.

Dick

P.S.: As a Conservative Republican, I support gay marriage.
What the hell is so special about homosexuals that
they should be spared both the marriage penalty and
in-laws.
 
S

Stuart O. Bronstein

Hard to get a malpractice suit going without any actual
damage. Is the tax paid on examination "damage?" Is it a
damage if he should've paid it (apparently) all along?
Don't know the answer to that question. Maybe some lurking
trial lawyer can tell us that.
My recollection is that in general the requirement to pay
taxes doesn't qualify as "damages" in a tort (such as
malpractice) case. On the other hand, if someone is promised
certain benefits that turn out not to exist, there may be a
breach of contract claim.

Stu
 
H

Harlan Lunsford

YES - Contact the state board of accountancy in the state
where the CPA practices. You may also want to provide your
information to that state's Society of CPAs "Peer Review
program".

JUST CURIOUS --- Was that CPA one that you were currently
doing business with? Specifically, was he currently
preparing your individual income tax returns? Did the seller
of the tax shelter (I ASS-U-ME that is what it was) provide
you with an opinion of any CPA who has given "him" such a
letter on the tax shelter itself?

Without providing the name or even city of the CPA, would
you please post here the written opinion your CPA gave to
you? I am curious as to "exactly" what your CPA did
gurarantee to you. I will then consult with a couple of
members of "my" state board just to get their general
reaction.
To Don: this question I think was in connection with a
college course versus actual case. (grin)

Cheer$,
Harlan Lunsford, EA in LA
 
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E

Ed Zollars, CPA

DonTheCPA said:
YES - Contact the state board of accountancy in the state
where the CPA practices. You may also want to provide your
information to that state's Society of CPAs "Peer Review
program".
Normally peer review is limited to attest engagements
only--tax matters do not fall under those procedures except
to the extent they impact the attest engagement. So, in
this case, it would seem that there *might* be an issue if
an attest engagement was involved since the CPA would have
been in full possession of the facts and should have
therefore known of a contingency that may have needed to be
disclosed under SFAS 5 (the potential tax liability).
However, without an attest engagement (a compilation would
be enough of one) I don't see that the peer reviewer would
have any jurisdiction.

The state board, as I noted before, likely would have
jurisdiction under the general rules for accepting an
engagement for which the CPA lacked adequate technical
competence and/or failure to properly supervise assistants.

But, as I also noted, the practical problem is getting the
client to file a complaint--a real problem if, in fact, the
client was not harmed.
 
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P

Phoebe Roberts, EA

Dick said:
P.S.: As a Conservative Republican, I support gay marriage.
What the hell is so special about homosexuals that
they should be spared both the marriage penalty and
in-laws.
Just for that, as soon as we can get married, my new wife
will become a stay-at-home mom for purposes of reaping a
marriage bonus. Since she currently works for her
not-in-laws, this will also allow her to be spared a good
portion of them. I live with mine, so there's no hope on
that front.

ObTaxes: As a soon-to-be beneficiary of tax welfare, I'm all
for abolishing it. The interaction of EITC, Child Tax
Credits (refundable of not), and the retirement savings
credit makes tax planning an impossible tangle. And any
normal person who qualified for them couldn't afford to pay
for that planning, either.

Phoebe :)
 

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