Wally Bitman, CPA, a sole practitioner, was behind on completing a client’s tax return. It wasn’t totally his fault—a glitch in his tax preparation software meant fixing many other clients’ returns as the April deadline approached. One of Bitman’s wealthier clients was always late with his information. This year, he’d definitely need to file an extension.

Pressed for time, Bitman called the client to get information for a K-1 not yet available. The client said the number “90,460”—but Bitman heard “19,460.” Bitman filed the extension using the lower amount, resulting in a significant tax underpayment.

This real-life scenario—with a changed name—comes from CAMICO’s claim files. The manic nature of tax season makes liability claims more likely when tax preparers do not take appropriate precautions. Taking these specific steps will reduce your professional liability.

1) Review Existing Engagement Letters

Engagement letters contain specific language that defines the scope of your work. A good engagement letter will remove all doubt about where a CPA’s responsibility ends and the client’s responsibility begins. Your engagement letter should require clients to furnish their information by a specific date, and warn that they could be subject to penalties if they don’t.

Review your existing engagement letters to ensure that they accurately reflect the scope of work. Did a client recently ask for investment advice? Or advice on paying foreign taxes? Make sure that your engagement letter is updated to reflect these new services, and clearly explain the risks assumed by the client. Proper documentation can save you from ever spending a day in court.

2) Send Clients a Tax Organizer

Tax organizers are a series of documents that require clients to list the tax information they supply you. A good tax organizer will make it easy for you to inspect a client’s tax information well before the filing deadline, and identify any discrepancies. You’ll still need to do a thorough review. One CAMICO policyholder submitted a claim after their Italian-speaking client misunderstood the forms and submitted incorrect information. In this case, the tax organizer enabled the CPA to show that the client’s misunderstanding caused the mistakes, not a miscommunication by the CPA.

Were something to go wrong, organizers provide you with significant defensive documentation. Detailed tax organizers can help lawyers build timelines and establish fault for specific actions. They also will guide lawyers’ research, enabling them to create a body of evidence that bolsters your case.

Clients may gripe that a tax organizer is a hassle, or say that they’re doing your work for you. Resist these complaints by making clear to them that tax organizers insulate you and your clients from missteps, liability, and penalties.

3) Start Documenting All Significant Conversations

Strong documentation of conversations can keep you out of court. When your documentation is comprehensive, you can usually demonstrate that you are not responsible for most issues. Documentation of your client communications gives your legal defense team a substantially greater chance at resolving issues and avoiding claims.

Once a lawsuit goes to trial, the plaintiffs have the right to look through all relevant documents in a process called discovery. If you, as a defendant, have extensive documentation that makes proving liability difficult for the plaintiff, they will be predisposed to settle the case.

Make sure that you are recording and archiving all significant client communications. These include:

• Engagement letters
• Tax organizers
• Tax records
• Phone calls, including summaries
• Meetings, including summaries
• Emails
• Text messages

Lawsuits can turn on the contents of a single email, and disputes on the nature of a single phone call. But with vigilant contemporaneous documentation, you may never have to appear in court.

4) Set Up a Secure Web Portal

Secure web portals are an expense that can save you money in the long run by limiting liability—among other cost-saving benefits. Portals are powerful documentation tools, and also serve as protection against hackers—who’ll find it considerably easier to obtain confidential information exchanged via email.

Portal software allows users to post matters directly from their tax and other software. This mechanism permits users to organize tax and other financial information with ease, permitting them to focus on other priorities. Plus, your clients will be able to share their information with you online at their convenience, avoiding the need to visit you in person, or the expense of a courier or postage.

5) Review Your Client List for Significant Personal or Business Changes

CPAs often sign up for liability insurance because they want to be insulated from fraudulent or unethical actions by their clients. However, CPAs frequently find themselves in the legal system because clients turn against each other, due to divorce or the dissolution of a business partnership.

Accountants are often surprised to find themselves in the middle of acrimonious events such as these, under threat of legal action by one aggrieved party or another—sometimes both. CPAs and other financial professionals can be convenient scapegoats for a party trying to recover more than their fair share of a disputed set of assets.

Attorneys are hired to vigorously represent their clients’ interests. As such, they will question your methods, competence, objectivity and adherence to professional standards to support claims that your services didn’t satisfy the standard of care. Liability insurance will enable you to mount a stronger defense and address frivolous lawsuits.

Periodically review your client list, and be alert to potential trouble. If you work diligently and exercise the documentation practices outlined above, you will dramatically improve your odds of avoiding and overcoming disputes. Regardless of whether you’ve implemented the defensive protocols, be prepared for professional liability issues as clients often involve CPAs in their personal, business and financial crises. Please call CAMICO when faced with such dilemmas.