Tax Malpractice Claims: The Hidden Penalty for Practitioners

By Bryan C. Skarlatos and Christopher M. Ferguson
Journal of Tax Practice and Procedure
April - May 2015 Edition

Taxpayers who get hit with unexpected tax bills sometimes look to their tax return preparer or tax advisor to help foot the cost. While tax practitioners may spend considerable time studying tax practitioner penalties under Code Sec. 6694, or tax practitioner standards under Circular 230 or the AICPA Statements on Standards for Tax Services (SSTS), many practitioners have not thought a lot about when they could be sued by their client for malpractice. 

What constitutes malpractice in a tax case? The elements of a tax malpractice claim are the same as any malpractice claim, or any negligence claim for that matter. They consist of a duty to the plaintiff, a breach of the duty, damages and causation (i.e., was the breach of the duty the proximate cause of the plaintiff’s injury). 

Tax Practitioner Duties

In general, tax professionals, like most other professionals, have a duty to exercise the skill, knowledge and ordinary care exercised by other members of their profession under similar circumstances. If the professional represents herself to have specialized knowledge or skills, she will be held to that higher standard of skill and knowledge. The tax area is one such specialized area.

In the tax profession, Code Sec. 6694, Circular 230 and the SSTS provide rules and standards governing areas such as competence, candor, due diligence and conflicts. These standards will often figure prominently in any tax malpractice action. They are not, however, conclusive. Many cases and commentators have specified that professional rules of conduct are not, in and of themselves, intended to create a cause of action for a prospective plaintiff. In some cases, such as section 10.33 of Circular 230 (“Best Practices for Tax Advisors”), the standards simply set forth best practices that are intended to be aspirational only. Other rules set minimum standards of conduct, such that a defendant’s mere conformance to the standard does not mean that he or she was not negligent. For example, standards governing the minimum threshold of confidence on a position for sanctions purposes do not resolve whether the position met the client’s expected level of certainty or whether the professional adequately communicated the risks inherent in the position to the client. Another point worth noting is that many standards governing tax practitioners, especially those in Circular 230, concern the practitioners’ duties to the IRS and/or tribunals, and do not necessarily translate to a duty to the client. Further, many professional standards adopt a reasonableness standard, so referring to the standards only begs the question as to what is reasonable.

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