Hard work and lurking danger – Carswellfamilyfoundation

Client AB retains services YZ CPA for tax return preparation. AB provides all information requested YZ, YZ maintains an ongoing dialogue with AB about the status and open positions, and AB – completely unfamiliar with taxes – completely depends on SW YZ misses the payment deadline and the IRS imposes a fine on AB. AB asks the IRS to reduce the penalty, arguing that it relies on YZ is a sufficient reasonable reason. Request rejected.

If this mundane pattern of facts sounds vaguely familiar, it should be. It reflects Boyle, 469 U.S. 241 (1985). Although a professional Boyle was a Supreme Court lawyer in Boyle established a clear rule that “late filing of a tax return cannot be excused by the taxpayer’s dependence on an agent, and such dependence is not a ‘reasonable reason’ for filing a tax return late.” When a taxpayer cannot obtain relief from a penalty and must pay out of pocket, that same taxpayer can seek reimbursement from the professional they believe is responsible.

It’s no news that if your client misses their due date, any role you played in that miss will be the focus of attention. However, professional liability claims related to missed deadlines are growing at a breakneck pace. Statistics from CNA, an approved underwriter of the AICPA’s professional liability insurance program, show that the share of tax claims related to late filing has increased from 25% in 2022 to 37% in 2023.

At the same time, IRS civil enforcement is intensifying, and strong headwinds portend smaller reductions in penalties. The warning is severe. If there is no expectation of relief from penalties for missed deadlines, then a claim blaming the CPA for those penalties may well be warranted.

Simple answer? Deploy some kind of system that tracks and alerts you to due dates, response times, and project status, often called an accounting system. Lately, however, CPAs who already have such a system in place often argue that it has “slipped away.” So the real solution requires you to first understand that the client’s key details can be overwhelmed by daily life, and then pause, re-emphasize diligence, and mend your proverbial cracks.

DOCKET. UPDATE. REVIEW. REPEAT.

Many practitioners already understand and use some version of an accounting system. This ranges from a modest spreadsheet to a full-fledged practice management package that lists forms and due dates. Practitioners are frantically double-checking their system to ensure that the work that should have been completed has been completed. During. However, deadlines continue to be missed. Why? The first clue is awareness: do you know there is a due date?

In addition to the annual periodic observance, there are many statutory dates. Examples include inheritance tax returns, income tax returns. for estates, and amended returns, especially in cases where the legislation has created an emergency that did not previously exist or where the original due date for payment has been postponed. There are also state and local tax withholding forms, as well as foreign tax withholding forms such as Forms 6166. US Tax Residency Certification, or 1042, Annual income tax return for foreign income earned in the United States. And it seems like an exchange of dates and sections. 83(b), sec. 754, corporate pass-through tax or passive foreign investment company election. In M&A transactions, the seller’s tax year may end on the last day of the month, the last day of the year, or some other date. The transaction may also result in organizations that disappear as quickly as they were created. The list goes on.

Here’s the thing: like any tool, your system’s ability to function properly depends on only is as good as your interaction with it. If the exact information is not defined and placed in the system, it will not work. The accuracy of your system reflects how quickly and accurately you understand the importance of the information you receive and how diligently you act on it to bring it into the system. Industriousness in the context of everyday life poses a particular challenge for two reasons:

Diligence requires a combined energy and focus that is not always available on demand; And
There are only a few things in everyday work that truly stand out and make you stop and take notice. to the exclusion of everything else.

Crucible of everyday life?

The second clue to why deadlines are missed is the curse and reality of work: interruptions. If you run a business, you are constantly bombarded with phone calls, employee interruptions, emails, digital static, and other interruptions. This truth creates what is called the threats lurking in the crucible of everyday life. As professors Karl Weick and Kathleen Sutcliffe explain in Managing the unexpected (3rd edition, 2015):

“Routine” refers to events that are common, everyday, and recurring. . . Calling everyday life a “crucible” makes it clear that these events are a repeated challenge. filled with breaks and recovery which can spread in unexpected directions. The operations we perform every day are essentially bets that what can go wrong won’t go wrong. But the real result of this bet depends on how attentive we must act in real time, here and now. (Emphasis mine)

Essentially, the main question is how do you process things that “usually” happen, blend in with the noise, but scream “ATTENTION: I require special attention!“If only things were less chaotic?”

Most CPAs are familiar with obtaining information, intuitively know exactly what needs to be done to avoid a problem, and start doing what needs to be done. . . and I get interrupted. The start-stop-start dynamics in our experience of “work” are so familiar that they seem, well, everyday. Yet the difficulty of mentally picking up a task from where you left off before it was interrupted is well studied and documented. The hidden danger is that every day, multiple times a day, CPAs are betting that they won’t miss something that later turns out to be more important than they thought it was at the time. They bet that if they miss something important, it won’t come back and bite them, and if it does, they can fix it with minimal cost and loss. Increasingly, CPAs are losing these bets. Claims statistics confirm this. A resurgent IRS appears to be increasing the odds on those bets.

What can I do? Stop. Set your priorities. Be diligent.

Coming full circle to the central question – how to avoid a missed payment claim at a time when the risk of that claim increases. The short but difficult answer is to stop and prioritize. Your accounting system can’t do it alone. Even someone with (literal) bells and whistles can’t upgrade. Someone with sufficient competence must cut through the noise and act accordingly.

Administrative staff and junior team members can help if they are an extension of you and not just an extension of the tool. You need to explain to them the downsides of missing deadlines—fines, potential claims, reputational damage—and tell them what to watch out for. Diligence (deliberate and persistent effort) and vigilance (attentiveness and vigilance) are essential elements for the successful functioning of any accounting system. And this is really the hardest part because both require time and energy. To be honest, sometimes it also requires a little luck.

Multiple due dates are here to stay, and neither are interruptions. In reality, it is often not one, but several interruptions. At this point, the relative volume of the first siren decreased compared to the volume of the siren announcing the next emergency. Competing client interests and business interruptions are an inevitable part of everyday life.

However, missing deadlines can be avoided in many cases. It all starts with diligence.

-52%: In FY23, the IRS reduced civil penalties at a rate of 10.2% (45,545,154 assessed; 4,664,075 mitigated), reduction by 52% compared to FY22 when civil penalties were reduced by 21.3% (39,898,114 assessed; 8,510,272 mitigated).

Sources: 2023 IRS Data Digest and 2022 IRS Data Collection.

J. Michael Reese, JD, LL.M., is director of risk consulting at CNA. For more information about this article, contact [email protected].

Continental Casualty Company, one of CNA’s insurance companies, is an underwriter of the AICPA Professional Liability Insurance Program. Aon Insurance Services, national administrator of the AICPA professional liability program, can be reached at 800-221-3023 or visit cpai.com.

This article provides information and does not provide advice or opinion. It is accurate to the best of the author’s knowledge at the time of publication. This article should not be considered a substitute for advice from an experienced professional. Such consultation is recommended when applying this material to any specific factual situation.

The examples are for illustrative purposes only and are not intended to establish any standard of care, serve as legal advice, or confirm that any particular factual situation is covered by any CNA insurance policy. The applicable insurance policy contains the actual terms, coverages, amounts, conditions and exclusions for the insured. All products and services may not be available in all states and are subject to change without notice.