TAX MALPRACTICE DAMAGES

• Published in: GPSolo Vol. 26; no. 6; p. 42
• Main Author: Todres, Jacob L
• Format: Trade Publication Article
• Language: English
• Published: Chicago American Bar Association 01.09.2009
• Subjects: Advisors; Attorneys; Costs; Fines & penalties; Injuries; Legal malpractice; Litigation; Negligence; Professional malpractice; Settlements & damages; State court decisions; Tax planning; Tax returns; Tax underpayment; Taxes; Torts; United States > US
• ISSN: 1528-638X; 2163-1727

Usually, the malpractice tort asserted against an attorney "is a specific application of the ordinary" tort of negligence (unless noted, all quotes from Bernard Wolfman et al., Standards of Tax Practice, 6th ed., Arlington, Virginia: Tax Analysts, 2004). The attorney must "act as a reasonably competent and careful [professional] would . . . [act] under similar circumstances." Because tax law is generally perceived as a specialty, the standard of care may be higher than in other attorney malpractice situations. To establish a prima facie cause of action, a plaintiff must show "(1) a duty owed by the attorney to the plaintiff ... ; (2) breach of that duty ... ; (3) injuries] suffered by the plaintiff; and (4) a 'proximate cause' relationship between the injury suffered and the attorney's breach of duty." The standards for accountants are similar to those for attorneys. One other aspect of recoverable damages needs to be focused on, and that is the general requirement imposed on an injured party to mitigate damages. Under normal tort principles, damages that may be minimized or reduced through reasonable efforts are not recoverable. In the tax context, this would be illustrated if, for instance, a return preparer made a simple mechanical error, such as reporting $10,000 of income as $100,000 or neglecting to claim a valid deduction. The recoverable damages would not normally include the full amount of the additional tax because an amended return easily could be filed to correct the error so long as the statute of limitations were still open. As a concomitant to not being able to recover the avoidable additional tax, the plaintiff may recover his or her mitigation expenditures (here, the cost of filing the amended return). Such mitigation or corrective costs, whether or not ultimately successful, are ordinarily an important element of recoverable tax malpractice damages. Corrective costs are the costs incurred to mitigate, or attempt to mitigate, the damages incurred. When tax malpractice occurs either in return preparation or tax planning, there normally will be a need to file late or amended tax returns. If an audit occurs as a result of the negligence, representation at the audit by either an attorney or an accountant will be necessary. Often, subsequent representation at administrative or legal proceedings also will be necessary to either attempt to salvage the desired tax treatment or to attempt to eliminate or minimize interest, penalties, or other negative tax consequences caused by the malpractice. All these and any other similar mitigation costs are corrective costs. If the malpractice occurs in a litigation situation, the corrective costs normally would be costs incurred to hire counsel to attempt to undo the mistakes of the negligent counsel. Although there do not seem to be many reported cases involving litigation-related errors, it is well established that corrective costs are recoverable as damages.