Friday, May 17, 2013
Despite considerable regulation of tax practitioners by both statutory rules and professional ethical standards, when a tax advisor mishandles a client’s tax work, whether because of incompetence, a conflict of interest or for some other reason, the client seeking redress must generally resort to malpractice or related actions against the errant tax advisor. Such actions draw upon a peculiar mixture of tax law, professional ethical standards promulgated by state bars and the IRS Office of Professional Responsibility and torts law, three areas of law usually frequented by different groups of experts. This article attempts to further understanding of this peculiar mixture by addressing core issues of malpractice and related causes of action in a tax practice context, covering issues such as the duties to the client, possible causes of action, damages, privity, statutes of limitations and repose, and the relevance of ethical rules. In addition, it discusses key procedures that tax practitioners can use to reduce their malpractice risk and explores some classic tax practice situations fraught with malpractice potential. While the discussion is largely based upon the standards applicable to lawyers, much of it applies equally to other tax practitioners, particularly CPAs. However, unlike other tax practitioners, lawyers generally cannot limit their malpractice liability prospectively or, if they can, can only do so with some difficulty. In addition, in some contexts lawyers may be subject to special rules, such as with regard to the applicable statutes of limitations. The article represents one view of important legal issues and concerns that tax professionals should bear in mind, along with other factors, in trying to prevent, avoid or mitigate the risk presented by malpractice-type litigation.