# Do tax accountants have liability for advice?



## james4beach

Very curious about something. I've hired an accountant to help me with some complicated cross border personal tax issues. I'm paying them $225 an hour for their "professional advice", and they claim to have detailed knowledge of what they're advising me on.

If they're wrong, or it turns out they were clueless about tax rules, I could be facing penalties on the order of $10k. The particular issue that could result in this penalty if I get bad advice is pretty clear, and I also have an email thread with the accountant where I got specific direction. I'm keeping this as paper trail.

In such a case -- if it turns out the accountant had no idea what they're doing -- can I sue them? I've done my due diligence by researching the topic in great detail myself, but I've reached the limits of what I can understand about tax law. That's why I hired the "professional".

Does the professional take on liability here? Because if not, I'm not sure why I'm paying them.


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## james4beach

Let me point out that doctors or engineers who are found to give bad advice and recommendations can be sent to jail. As in the news recently...

So, are accountants professionals or not?


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## wendi1

Accountants will not pay your penalties. However, most of them will go to bat for you if you are challenged by CRA (participate in the audit, argue their case at the hearing, and do their best).

Tax code is full of grey areas and shifting sands. If accountants had to cover your losses, they would be much more expensive.


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## OptsyEagle

Everyone can be sued.


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## marina628

Every year we do our corporate accounting we sign a waiver which says she has done our income taxes based on infomation we provided to her and she is not liable for any audits etc. We have gone through an audit and our accountant dealt with it for us ,they disallowed some expenses as we spent more than $30,000 on a second and third car and they didn't give us back the full HST credit,I guess they cap it at 30k after the first purchase.


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## Charlie

If the accountant had 'no idea' what they were doing, and were 'clueless about the tax rules' they're probably on the hook for the penalty. Basic negligence. But if they exercised reasonable diligence but were challenged and lost on a position they took, then it's less likely. They're advising you....not insuring you. Tax advisers tend to have all sorts of caveats in their terms of engagement.


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## wendi1

LOL OptsyEagle.

When your accountant's erroneous advice results in someone's death, I would certainly sue.


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## james4beach

What I hired the accountant to do in my case was give me specific advice about my obligations for US taxes. The accountant says they have expertise in this area and they said they are qualified to give advice.

After presenting my situation, I asked the question: in my case, do I have to file FBAR disclosures to the IRS? The accountant said no, you don't have to.

IRS penalties for failing to file FBAR, if required, are on the order of 10k per account which could result in fines for me of around 40k.

If the accountant is right on this point, then no problem obviously. But if the accountant misinterpreted tax rules and has given me bad advice, it could cost me 10k to 40k.


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## CPA Candidate

Yes, you could sue the accountant if they were negligent in preparation of the tax files. In my business law education they stressed this quite a bit.


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## Charlie

It will depend on the nature of the advice they give you.

If they say we don't think you have to file the forms because of a b and c, then they are providing an opinion and are less likely to be on the hook (especially if the assumptions under a b or c are challenged).

If they simply err, fail to file an election or otherwise screw up, then they're likely liable. They will have tried to limit their exposure through the terms of engagement, but they can't completely dodge their responsibility.

If you want certainty, you should probably file the forms....


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## Eclectic12

Charlie said:


> If the accountant had 'no idea' what they were doing, and were 'clueless about the tax rules' they're probably on the hook for the penalty. Basic negligence ...


My understanding is that both the CRA and the IRS will go after the tax payer and it's up to the tax payer to get what they can from the accountant and/or to go to court to prove it wasn't their mistake so that the penalties are reduced to something more reasonable.



> Notwithstanding the third-party penalties, the Canada Revenue Agency takes the position that the taxpayer is the one solely responsible for the preparation and submission of his or her return. Engaging someone to prepare the return does not absolve the taxpayer from that responsibility.


http://www.cga-canada.org/en-ca/Abo...ov-Dec/Pages/ca_2007_11-12_prof_taxforum.aspx




> I've heard from some Lehigh Valley residents who have experienced errors on their returns and had problems with their returns even being filed. They told me the government focused on getting its money, not on how the mistakes were made.
> 
> "In terms of what we can do to help, we really can't," said David Stewart, a spokesman for the Internal Revenue Service.


http://articles.mcall.com/2012-02-1...tax-preparers-treasury-inspector-tax-software


The extreme case that was covered by an US investigative show was an tax return preparer who did something like 80% of the town residents taxes in the US. Problem was that instead of filing the returns/sending in the tax payments, he was pocketing the money. When the jig was up, he disappeared and the town residents were horrified to find out they were on the hook for the back taxes and had to go to court to get the punitive penalties waived for a situation that affected a lot of people. 


Cheers


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## Charlie

Agreed, Eclectric....IRS would assess James. He then goes after the accountant. Accredited accountants do carry insurance for this sort of thing.


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## donald

Even if you the accountant failed to catch something and you got in a bind it's highly unlikely you would be able to get a successful claim.
Once the insurer of the accountant is contacted you end up fighting with DEEP POCKETS(best lawyers) and they don't settle easily(future claims ect)
Your hooped either way likely.
Suing professional designations(accts/lawyers/doctors ect)is a waste land!
Make sure it does not happen.


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## Guban

james4beach said:


> What I hired the accountant to do in my case was give me specific advice about my obligations for US taxes. The accountant says they have expertise in this area and they said they are qualified to give advice.
> 
> After presenting my situation, I asked the question: in my case, do I have to file FBAR disclosures to the IRS? The accountant said no, you don't have to.
> 
> IRS penalties for failing to file FBAR, if required, are on the order of 10k per account which could result in fines for me of around 40k.
> 
> If the accountant is right on this point, then no problem obviously. But if the accountant misinterpreted tax rules and has given me bad advice, it could cost me 10k to 40k.


Are you sure you don't need to file FBAR? I thought that once you passed the substantial presence test, you had to. Closer connection or not, ...


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## Zeeshanbmerchant

If they are a designated accountant they have to carry liability insurance to follow the required guideline for a registered practice with their association

If they aren't a designated accountant should you be going to them in the first place ?


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## james4beach

This accountant is both a CA and CPA.



Guban said:


> Are you sure you don't need to file FBAR? I thought that once you passed the substantial presence test, you had to. Closer connection or not, ...


This is why I asked the accountant to clarify. The reply was: "FBAR filing is only for US citizens and residents"

The accountant recommended that I file 1040NR (non-resident alien) along with the appropriate form that invokes the tax treaty to be treated as a resident of Canada for taxes, and therefore a non-resident of the US. I would _not_ be using closer connection exemption but rather invoking the treaty to establish that I am a non-resident. I would file returns in both countries.

I must also check form 8938 (Foreign Financial Assets) requirements which I did not specifically ask about. It's similar to FBAR.


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## james4beach

This is really complicated stuff by the way. Interpretation of tax laws that are in flux (the IRS has updated these rules several times in the last 5 years). That's why I hired an accountant... and again, it's why I'm wondering what my recourse is if the professional is giving me bad advice.

I can't possibly be expected to become a master of US tax law and the interplay with tax treaties?

By the way this IRS page on 8938 says who has to file 8938. The only nonresident aliens who have to do so are those who elect to be treated as residents. From my reading, I wouldn't have to file 8938


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## james4beach

I studied more on this issue (including some reputable legal resources online), and now I think there's a strong chance the accountant is wrong.

What do I do now? Maybe I misinterpreted some of the legal text -- totally possible -- but ... if the accountant is wrong, should I be paying for their time if they're _learning from me_?


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## Karen

james4beach said:


> ...What I hired the accountant to do in my case was give me specific advice about my obligations for US taxes. The accountant says they have expertise in this area and they said they are qualified to give advice.
> 
> After presenting my situation, I asked the question: in my case, do I have to file FBAR disclosures to the IRS? The accountant said no, you don't have to...
> 
> IRS penalties for failing to file FBAR, if required, are on the order of 10k per account which could result in fines for me of around 40k.
> 
> If the accountant is right on this point, then no problem obviously. But if the accountant misinterpreted tax rules and has given me bad advice, it could cost me 10k to 40k.


You are right to be concerned because, as the widow of an American citizen who lived with me here in Canada, I noticed one very basic error in the advice your accountant gave you (unless it was simply a misquote on your part): FBAR reports are NOT to be filed with the IRS, It states right on the first page of the FBAR "File this form with U.S. Department of Treasury, P.O. Box 32621, Detroit, MI 48232-0621." It also says at the top of the page: "Do NOT [their emphasis] file with your Federal Tax Return." Actually this isn't a tax situation at all; you're simply declaring your financial interests in foreign countries - if there's any tax due on it, you show that on your tax return of course. 

Unfortunately, the accountant we used (David Ingram), who was extremely knowledgeable in this area, has since died so I can't recommend him to you. But he often mentioned that one has to be extremely careful when hiring an accountant who claims to be an expert in Canada-U.S. tax matters. He said many (in fact, he actually said "most") accountants who make this claim truly believe they are experts, but they really are not and, with the best of intentions, can get their clients in serious trouble. The penalties you mentioned are the minimum penalties; they can even include jail time.

I understand that David Ingram's son took over his business, but I don't have any idea how competent he is. (My husband had died before David did, so I never had any reason to use his son's services.) If you would like to contact the son and see what you think, send me a private message, and I'll try to find a phone number for you.


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## NorthKC

Designated accountants are required to have professional liability insurance if they are licensed public accountants. You can definitely request to see it anytime you want to as well as call the Institute to verify the accountant. Bottom line, if the accountants have done their due diligence, very rare will they be on the hook for any penalties. The onus is always on the taxpayer to ensure that their accountant receive ALL the information. Penalties often occur due to missing information that under normal circumstances, the accountant would not have been aware if the taxpayer don't give them any info.


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## mahmood

james4beach said:


> Very curious about something. I've hired an accountant to help me with some complicated cross border personal tax issues. I'm paying them $225 an hour for their "professional advice", and they claim to have detailed knowledge of what they're advising me on.
> 
> If they're wrong, or it turns out they were clueless about tax rules, I could be facing penalties on the order of $10k. The particular issue that could result in this penalty if I get bad advice is pretty clear, and I also have an email thread with the accountant where I got specific direction. I'm keeping this as paper trail.
> 
> In such a case -- if it turns out the accountant had no idea what they're doing -- can I sue them? I've done my due diligence by researching the topic in great detail myself, but I've reached the limits of what I can understand about tax law. That's why I hired the "professional".
> 
> Does the professional take on liability here? Because if not, I'm not sure why I'm paying them.


If your personal tax issues that you're seeking advice on are complicated as you said and involve international tax knowledge, I would say you are either getting a great deal at only $225/hour, or the tax advisor may not be as qualified as they should be to deal with complicated foreign tax issues.


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## james4beach

The issues are complicated only because the US has revised these laws in the last couple years. If accountants were up to date with the laws, it wouldn't be so complicated.

But the changes are new and are going to impact not just me but many other Canadians. I suspect most people who are affected (like snow birds, property owners in the US, temporary US workers) don't realize it yet

Maybe I"ll look for a better accountant in the states. The Canadian side is easy, it's the US side that scares the living s*** out of me.


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## mahmood

james4beach said:


> The issues are complicated only because the US has revised these laws in the last couple years. If accountants were up to date with the laws, it wouldn't be so complicated.
> 
> But the changes are new and are going to impact not just me but many other Canadians. I suspect most people who are affected (like snow birds, property owners in the US, temporary US workers) don't realize it yet
> 
> Maybe I"ll look for a better accountant in the states. The Canadian side is easy, it's the US side that scares the living s*** out of me.


If you pick one of the large 7 firms (Deloitte, PWC, Ernst and Young, KPMG, BDO, MNP, or Grant Thornton) you should be fine. Even if not, there are many small practices other than them that have expertise, but you should only choose a smaller practice if someone you trust has had experience with them and refers you.

The hourly rate of a U.S. or International Tax Specialist would likely be $400-$600/hour if you only need an hour or few hours of work. You can probably negotiate it down to $300-$400/hour if there is some volume involved. 

And if they're filing something for you, they'll get a more junior person to work under their guidance and review for a rate of 1/3rd to 1/2 of their rate.


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## james4beach

Thanks good points there

I went with a smaller private firm because a family friend (who is a competent accountant himself) specifically referred me this person who does US/Canada tax issues.

The accountant has been responsive when I sent them a list of my concerns regarding the new laws. I also linked to several reputable legal resources that contradict what they first advised me. They've said they are taking a look into it, to update themselves as per the new rules taking effect this year, and will get back to me without additional charges for their time.


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## Charlie

If it's a smaller cross border firm, recommended by an accountant friend, you're probably at the right place. The big firms are not set up to deal with your issue -- they'll assign it to a very junior staff member and you'll pay through the nose as he or she learns, and then it's reviewed by someone else at an even higher rate. Your small firm guys may even be former big firm people. A cross border firm will deal with this situation more frequently -- though possibly, you're their first! If they later learn their advice was wrong, they'll contact you -- they don't like being sued.

This sounds like a specific, if complex. question. If they arrive at a definitive answer, they'll usually take responsibility if they're wrong -- and they're insured for that. With a dozen caveats about interpretations, complete info, rule changes etc.

I'm hearing from several sources that this US reporting stuff is getting very complex with potentially prohibitive compliance costs -- and even uglier non-compliance penalties.


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## RCB

I've been caught up in this issue for two years, and refuse to accept "professional" advice as it is conflicting. Even the IRS and Treasury can't give proper advice on the matter.

If you haven't been to the Isaac Brock Society website, I would strongly suggest checking the resources there to determine if FBARs are required.

Proudly renounced 1992, angrily re-renounced 2013.


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## mahmood

Charlie said:


> The big firms are not set up to deal with your issue -- they'll assign it to a very junior staff member and you'll pay through the nose as he or she learns, and then it's reviewed by someone else at an even higher rate.


I respectfully disagree, I'm with a "large-medium" firm myself (one of the 3 I mentioned out of the list of 7 that were non big 4). I've also been at both a Big 4 and a small firm in the past. Perhaps it varies by city/office too. In my office of 150+, there's only one man who deals with complex international tax issues, has decades of experience, and would do the consultation himself at the $400-$600/hr range. Only if an actual return needs to be prepared would someone more junior come in (and the senior specialist would review/fix the work).

By the way I'm not trying to sell anything, which is why I'm not even mentioning the firm I'm with, just sharing my knowledge.


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## james4beach

A colleague at my previous company used one of those large firms, paid for by the company, to handle his complex US-Canada issues.

The large firm made a huge mess of it (after charging him a fortune), so I don't automatically trust the big firms any more than small firms.


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## Canadian

If you are penalized then you can pursue a civil suit for breach of due care. If you want to take it an extra step you can contact the accountant's governing body (if I remember correctly, you are in Ontario - the provincial body there is the ICAO) and report the accountant for failing to comply with the profession's rules of professional competence (you can cite the specific breach - there is a document on the ICAO's website detailing the ROPC).


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## Zeeshanbmerchant

mahmood said:


> If you pick one of the large 7 firms (Deloitte, PWC, Ernst and Young, KPMG, BDO, MNP, or Grant Thornton) you should be fine. Even if not, there are many small practices other than them that have expertise, but you should only choose a smaller practice if someone you trust has had experience with them and refers you.
> 
> The hourly rate of a U.S. or International Tax Specialist would likely be $400-$600/hour if you only need an hour or few hours of work. You can probably negotiate it down to $300-$400/hour if there is some volume involved.
> 
> And if they're filing something for you, they'll get a more junior person to work under their guidance and review for a rate of 1/3rd to 1/2 of their rate.


I respectfully disagree with the above

In my experience, the bigger firms are some of the worst at breaking competency and diligence standards. They only care about large clients, and shove students not equipped to deal with the issues elsewhere. Students make tons of errors, and usually the reviewer has over extended themselves so much that they start to take shortcuts.


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## Canadian

Zeeshanbmerchant said:


> In my experience, the bigger firms are some of the worst at breaking competency and diligence standards. They only care about large clients, and shove students not equipped to deal with the issues elsewhere. Students make tons of errors, and usually the reviewer has over extended themselves so much that they start to take shortcuts.


This is a broad statement. While I don't _totally_ disagree, it is not totally accurate. Experiences vary greatly between firms and regions, so one should be careful before stating such a generalization.

Additionally, the big _four_ (PwC, Deloitte, E&Y, and KPMG) are quite a bit different from BDO and MNP in terms of culture and practices. Grant Thornton isn't as far a stretch - but still different.


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## OurBigFatWallet

All firms have professional liability insurance that can be purchased through their provincial institute. The bigger the firm the more coverage there is. With that being said whenever a new client is taken on they sign an engagement letter that basically outlines the terms of an engagement and reduces the liability of the firm. In other words for a personal tax return the firm only prepares the return based on what the client shows as income. If the client hides it, it's their fault and not the firm


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## amitdi

Can you hire a lawyer to advice whether you can sue the accountant if he messes. What if the lawyer gives you an incorrect advice on whether you can sue, can you now sue the lawyer?

(Just kidding...)


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## Canadian

OurBigFatWallet said:


> All firms have professional liability insurance that can be purchased through their provincial institute.


The outstanding question is whether the OP's accountant is with a firm or independent.


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## richard

amitdi said:


> Can you hire a lawyer to advice whether you can sue the accountant if he messes. What if the lawyer gives you an incorrect advice on whether you can sue, can you now sue the lawyer?
> 
> (Just kidding...)


You can, but you'll need a second lawyer since most of them will be reluctant to sue themselves


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## OurBigFatWallet

Canadian said:


> The outstanding question is whether the OP's accountant is with a firm or independent.


Sole practitioners can purchase insurance as well and the cost depends on gross billings. Higher billings means higher insurance costs


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## fraser

Litigation is very expensive and it is very risky. I suspect that the dollar value of the damages would be a starting point. 

And I suspect that it is very difficult to get one professional in a self governing body to testify against another.

If there is a problem, most self governing bodies have a complaints procedure that might be a less expensive path if there really is a breach of professional standards.


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## Canadian

OurBigFatWallet said:


> Sole practitioners can purchase insurance as well and the cost depends on gross billings. Higher billings means higher insurance costs


Yes, what I meant is a larger (regional/national/global) firm will certainly have extensive liability insurance - independent practitioners _can_ (and should) have pretty good coverage but it can vary significantly.

I think this discussion is beginning to deviate from the OP's question, though. If I understand correct - the OP's concern is suing to recover his fees/penalties because of the substandard work. An accountant/firm with insurance can still be sued if the plaintiff can demonstrate that he/she suffered due to a breach of due diligence or standard of care. The insurance coverage simply determines whether damages will be paid by the insurance company or the defendant.


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## sags

If a person is going to sue, they need to calculate the probable cost and be very confident of the outcome.

Remember, that if a person sues and loses...........they may also have to pay the defendant's legal costs.


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## fraser

There is also a HUGE difference between someone who is fully qualified and in possession of a professional designation such as CA and someone who simply opens shop, calls themselves an accountant or tax advisor, and solicits business.

The CA is held to a professional standard by his/her governing body. The person who opens shop, the latter, is not held to this professional standard. He or she may be a first class tax expert but could also be half baked or even a shyster.

You need to know who you are dealing with, what their professional designations are, and if he or she is in fact held accountable by any professional governing body.

Also keep in mind that obtaining a judgement is very different than actually collecting on that judgement.


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