Subject: FBAR reporting; admitting liability/assuming damages without prior consent
Services: Tax Return Preparation
Battle #1: FBAR reporting
For more than a decade, Sidney Swenson, CPA, prepared tax returns for one of his more successful clients, Matt Morrow, a star salesman in the construction supplies industry. Morrow had taken a job five years earlier in sales for Acme Building Products and Supplies, headquartered in the British Virgin Islands (BVI). Morrow was a U.S. citizen and maintained his residence in the U.S. but lived part time in BVI.
Each year Swenson sent his tax return clients an engagement letter that included language advising them of their responsibility to comply with FBAR (Report of Foreign Bank and Financial Accounts). To help clients comply with FBAR, he also included a question about foreign bank accounts in their tax organizer.
Morrow never returned his tax organizer or engagement letter, but Swenson spoke with him over the phone each year to answer the organizer questions, sometimes in a cursory manner just before the return deadline. Morrow always replied that he did not have a foreign bank account.
After about five years of this routine, the IRS notified Swenson and Morrow that one of Morrow’s tax returns was under audit. When the question regarding foreign bank accounts came up again, Morrow admitted that he did have an account in BVI but kept the account balance below $10,000, the FBAR reporting threshold, by transferring the funds immediately into his U.S. bank account. The only exception to this occurred when he received extra commissions for exceeding certain sales targets, causing the balance to briefly go above $10,000 until he transferred the money out of the account.
Swenson was planning to represent Morrow in the audit, but when Swenson spoke with him about the FBAR-related question in the tax organizer, Morrow stated that he did not remember Swenson asking him questions about foreign bank accounts. He also stated Swenson should have known about his FBAR obligations because of his residence in a foreign country, and that Swenson should have warned him about how significant the penalties could be.
Swenson realized too late that he should have required Morrow to sign and return the engagement letter, which included language informing the client of his FBAR reporting responsibilities. A signed letter would have documented that Morrow accepted his responsibilities and would have been Swenson’s first line of defense in the dispute.
Select the one answer that is the best response to the following question:
1) What should the CPA do now that the client has a delinquent FBAR?
A.
Continue to assist the client and advise him about how to comply with the FBAR requirements.
B.
Report the matter to CAMICO as soon as he becomes aware of potential errors or circumstances that may become the basis of a claim.
C.
Advise the client to immediately retain an experienced attorney skilled in taxation and criminal law.
D.
B and C.
Answers
1) Answer A: Incorrect.
The CPA should no longer assist the client with these issues and should advise the client to retain an experienced tax attorney. CPAs do not enjoy a confidential communication privilege as do attorneys, and would not be able to keep client disclosures confidential, putting the client at risk. Experienced counsel will be able to protect privileged communications, manage the FBAR disclosure, and address any related state law issues and risks. And the matter should be reported to CAMICO as soon as possible.
Answer B: Correct, though there’s a better response.
Contacting CAMICO before taking any action will help assure coverage for a potential claim, and CAMICO will advise the CPA on the best course of action. In this case, the CPA should no longer assist the client with these issues and should advise the client to retain an experienced tax attorney. CPAs do not enjoy a confidential communication privilege as do attorneys, and would not be able to keep client disclosures confidential, putting the client at risk. Experienced counsel will be able to protect privileged communications, manage the FBAR disclosure, and address any related state law issues and risks.
Answer C: Correct, though there’s a better response.
The CPA should no longer assist the client with these issues and should advise the client to retain an experienced tax attorney. CPAs do not enjoy a confidential communication privilege as do attorneys, and would not be able to keep client disclosures confidential, putting the client at risk. Experienced counsel will be able to protect privileged communications, manage the FBAR disclosure, and address any related state law issues and risks. And the matter should be reported to CAMICO as soon as possible.
Answer D: Correct, and the best response.
The matter should be reported to CAMICO as soon as possible, before taking any action, and the client should be advised to immediately retain an experienced attorney skilled in taxation and criminal law. CPAs do not enjoy a confidential communication privilege as do attorneys, and would not be able to keep client disclosures confidential, putting the client at risk. Experienced counsel will be able to protect privileged communications, manage the FBAR disclosure, and address any related state law issues and risks.
Battle #2: Admitting liability/assuming damages without prior consent
Swenson used a tax software program that enabled payments to be made electronically to taxing authorities. Swenson and Morrow made electronic payments from Morrow’s account to both the IRS and the state taxing authority. Unfortunately, Swenson didn’t realize that the state where they were making a tax payment did not allow payments to be made electronically for the type of return being filed, and the payment did not go through.
Two months later, Morrow noticed that the funds intended for the state tax payment were still in the bank account he intended to use for the payment. He notified Swenson, who verified that the payment did not go through and then attempted to make the payment directly from Morrow’s account to the state taxing authority.
A miscommunication between Morrow and Swenson caused the CPA to enter information for another account that Morrow did not want to use for the state tax payment. As a result, there were insufficient funds in the account for the payment, and the state taxing authority imposed a penalty for the “bounced” attempted payment. The penalties and interest for the late payment and the insufficient funds totaled about $25,000.
Morrow was disappointed and upset with the penalties and interest charged. Swenson, wanting to reassure the client and minimize the interest owed, emailed Morrow that he would “cover” the penalties and interest from his own account, and then prepare a tax penalty abatement request.
Swenson paid the amount from his account and then submitted a penalty abatement request. Several weeks later, Swenson received a letter from the tax authority denying the penalty abatement, and he then reported the claim to CAMICO.
After reading the following questions, select the one answer that is the best response.
2) What problems exist with Swenson’s claim?
A.
The CPA voluntarily made a payment without the prior written consent of CAMICO.
B.
The CPA communicated with the client that he would assume the damages arising from the errors.
C.
The CPA took action on the matter before reporting it to and consulting with CAMICO.
D.
A, B and C.
3) If Swenson had reported the matter to CAMICO before taking action or communicating with the client, CAMICO would have:
A.
denied the claim due to the miscommunication between the client and policyholder.
B.
helped the policyholder achieve a resolution with the client.
C.
helped prepare the tax penalty abatement request.
D.
helped draft talking points for communicating the facts of the situation with the client.
E.
B, C and D.
Answers
2) A: Correct, though there’s a better response.
Policyholders should not admit any liability, assume any damages, voluntarily make any payments, or incur any claims expenses without the prior written consent of CAMICO. Doing so will violate CAMICO policy conditions and may result in a denial of coverage.
B: Correct, though there’s a better response.
Policyholders should not admit any liability, assume any damages, voluntarily make any payments, or incur any claims expenses without the prior written consent of CAMICO. Doing so will violate CAMICO policy conditions and may result in a denial of coverage.
C. Correct, though there’s a better response.
Claims and potential claims should always be reported as soon as possible and before taking any action without guidance from your risk adviser. CAMICO encourages the early reporting of claims by reducing the deductible by 50 percent, up to $50,000, for any potential claims that is reported before a claim is made. Further, if CAMICO determines that it is appropriate to retain legal counsel to assist with a pre-claim situation, the legal expenses will be absorbed by CAMICO.
D. Correct, and the best response.
Policyholders should not admit any liability, assume any damages, voluntarily make any payments, or incur any claims expenses without the prior written consent of CAMICO. Doing so will violate CAMICO policy conditions and will unfavorably affect CAMICO’s ability to defend the policyholder. Claims and potential claims should always be reported as soon as possible and before taking any action without guidance from your risk adviser. CAMICO encourages the early reporting of claims by reducing the deductible by 50 percent, up to $50,000, for any potential claims that is reported before a claim is made. Further, if CAMICO determines that it is appropriate to retain legal counsel to assist with a pre-claim situation, the legal expenses will be absorbed by CAMICO.
3)
A. Incorrect.
Claims may be excluded for dishonest, fraudulent, malicious or criminal acts, errors or missions. But ordinary negligence, errors and omissions are not necessarily excluded.
B. Correct, though there’s a better response.
CAMICO’s claims experience shows that the sooner claims and potential claims are reported, the more effective CAMICO is at achieving an early resolution. Policyholders should not take action without guidance from a risk adviser. Early reporting will also help assure coverage for the potential claim. CAMICO encourages the early reporting of claims by reducing the deductible by 50 percent, up to $50,000, for any potential claim that is reported before a claim is made. Further, if CAMICO determines that it is appropriate to retain legal counsel to assist with a pre-claim situation, the legal expenses will be absorbed by CAMICO.
C. Correct, though there’s a better response.
CAMICO provides tax and legal expertise for a wide variety of matters, including tax penalty abatement requests. If CAMICO determines that it is appropriate to retain legal counsel to assist with a pre-claim situation, the legal expenses will be absorbed by CAMICO.
D. Correct, though there’s a better response.
CAMICO will help policyholders draft talking points for communicating the facts of a situation with the client. For example, clients don’t always understand why they are being charged interest for an unpaid tax liability by the IRS until they consider that they had use of the funds during the time that the liability was not paid.
E. Correct and the best response.
CAMICO can help policyholders achieve a resolution with the client, prepare the tax penalty abatement request, draft talking points for communicating the facts of the situation with the client, and provide other legal services if the need arises.
“War Stories” are drawn from CAMICO claims files and illustrate some of the dangers and pitfalls in the accounting profession. All names have been changed.
