By Deborah K. Rood, CPA, MST

In my role as a risk control consulting director at CNA Insurance, I help CPAs identify potential risks they may encounter when providing professional services and help them identify ways to mitigate those risks in a way that is practical for their firm.

The past two years have been challenging. CPAs have struggled to identify and understand rules related to new programs, which often have limited or unclear guidance. Our team has focused on understanding how claims may arise in the future and what CPAs can do now to address those potential risks.

Providing services related to Paycheck Protection Program (PPP) loan applications, followed quickly by PPP loan forgiveness applications and the employee retention credit (ERC), have many tax practitioners concerned. These programs still have many unanswered questions surrounding them. It should not surprise anyone that uncertainty can create or increase malpractice exposure for CPA firms.

Guess what else can lead to increased professional liability risk for CPA firms? The ongoing difficulty of corresponding with the IRS.

In this blog I’ll look at both of these risks and outline a few steps CPAs may consider implementing to reduce their risks.

Address the Uncertainty

Uncertainty appears to be hitting tax professionals from every direction. Do you know all of the answers regarding how to calculate the ERC? PPP loan forgiveness? With the potential passage of the reconciliation bill on the horizon in the U.S. Congress with its added tax provisions, the need to learn about and implement even more tax law changes could be on you quickly.

This newness and uncertainty create a classic trap for CPAs:

How do I treat [fill in the blank] when there isn’t a clear answer or established guidance? I could do it this way, and this would be the result. However, if that ultimately is not the right answer or the IRS disagrees with the position, the client’s loans may not be forgiven or they may be assessed penalties. As a result, I may be subject to a professional liability claim. On the other hand, if we treat it differently, the client may not maximize loan forgiveness or pay more tax than necessary.

The answer to this quandary is simple: have the client make the decision. Explain the options and the pros and cons of each approach, but ensure that the client makes the decision. After all, it is the client’s tax return, loan application, or forgiveness application, and it is the client’s responsibility to decide what positions to take. Remember to obtain the client’s instructions in writing and retain such in your workpapers.

Tackling IRS Challenges

During the COVID-19 pandemic, the IRS closed in-person services at most, if not all, facilities. Millions of pieces of correspondence, such as paper-filed tax returns, payments, responses to notices, and more, were not processed during this time. As most tax practitioners have experienced, a significant correspondence backlog developed that the IRS has struggled to overcome.

I wish I had the answers to resolve these IRS issues, but I don’t. However, I have some advice to help keep you and your clients out of hot water: work with what the IRS gives you, and, importantly, document your efforts.

Here are a few resources the IRS has for practitioners: Practitioner Priority Service (PPS), Taxpayer Advocate, tax transcripts, and the new Tax Pro Account. While none of these represents a silver bullet that will resolve your client’s challenges, they may assist in getting you closer to doing so.

Certainly, CPAs are exasperated with the IRS, but the frustration coming from clients is loud and clear: “Why can’t you fix this, CPA?” Clients may not understand that there are limits to what a CPA can do and that any “fix” must emanate from the IRS. For the vast majority of irritated clients, discussing IRS issues – perhaps pointing to news articles addressing or reporting on them – will be sufficient. More concerning is the client who believes that the problem remains with you, the CPA, rather than with the IRS.

To combat this perception, document as much as you can. Document all of your communications with the IRS. Maintain a record of every phone call, including the date, the time, and with whom you spoke and the results of that discussion. If sending something to the IRS, send it certified mail, return receipt, describing what was sent on the receipt and make sure you retain a copy of what was mailed.

An added benefit of this documentation is that it may assist in abatement of any penalties that may be assessed by the IRS, further mitigating the risk of a malpractice claim.

I cannot stress this enough, so I will say it again: documentation is critical. Document every client decision – the tax return you prepare is a reflection of the client’s representations, and the client is ultimately responsible for it. Documenting interactions with the IRS also may help resolve issues with both the IRS and clients.

Deborah K. Rood, CPA, MST, is risk control consulting director at CNA Insurance in Chicago. She can be reached at deborah.rood@cna.com. This information has been produced by CNA, which is solely responsible for its content. Continental Casualty Company, a member of the CNA group of insurance companies, is the underwriter of the AICPA Professional Liability Insurance Program.

This article should not be viewed as a substitute for the guidance and recommendations of a retained professional. Examples are for illustrative purposes only and not intended to establish any standards of care, serve as legal advice, or acknowledge any given factual situation is covered under any CNA insurance policy.

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