Quick: Can you detail the tax consequences of the Inflation Reduction Act of 2022? What about the Infrastructure Investment and Jobs Act of 2021? The SECURE Act of 2019?
Chances are that you know a little something about most of these laws. Depending on the exact nature of your job, you might even know a lot about most of these laws.
But how much are you expected to know about tax laws and related changes—and do you have a duty to advise clients of any potential impact?
The Comedy Store Lawsuit
Earlier this summer, a California business filed a lawsuit against its accounting firm claiming, among other things, gross negligence and breach of fiduciary duty. The business, the Comedy Store—yes, where Richard Pryor and Robin Williams each got their start—claims that its accountants misrepresented “its expertise and knowledge about a Federal COVID-related relief program.” As a result, the company claims, they suffered at least $8.5 million in damages when they missed out on the funds.
According to the complaint, the business “easily met all the published operational and related requirements” and “likewise satisfied the financial criteria.” However, they were a little too late. They allege that their accountants failed to advise them of the application deadline, so they missed out on the opportunity.
The case was dismissed due to a lack of subject matter jurisdiction. The judge didn’t evaluate the case on the merits but found a problem with the pleading. That’s because under 28 U.S.C. §1332(a), federal district courts may only hear cases relating to federal law or cases where the plaintiff and defendant are from different states and the amount in question exceeds $75,000. Here, the judge found that the plaintiff didn’t do enough to prove that the defendant was not a “citizen” of California, so the matter was dismissed.
Because the matter didn’t proceed—and the defendant did not need to file an official response to the complaint—we don’t know all the details. Since we haven’t seen the evidence, we don’t know exactly what kind of information was provided and what sorts of caveats might have been given. And importantly, since there wasn’t a ruling on the merits, we don’t know what elements a court might offer the most weight.
I think this case remains important because it raises questions that professionals regularly face: How much are you expected to know, and what are you required to tell your clients?
It’s easier to look at this in two distinct pieces. First, how much are you expected to know?
The best place to start is to look at the rules governing your profession. That might include the Rules of Professional Conduct, the AICPA Code of Professional Conduct, Circular 230, or a combination of these. In some instances, there also may be substantive or procedural laws that apply.
Most of the rules make clear that if you hold yourself out as knowledgeable in a particular area, you have a duty of competence. That can take on a lot of forms. But importantly, it includes staying on top of changes in the law—that’s where all those continuing education requirements come in handy. And that means that if you communicate to a client that you can prepare a certain kind of tax return or help apply for employee retention credits, you understand the related rules and requirements, including updates.
Sometimes, clients—and potential clients—may believe that your area of expertise or knowledge is more extensive than it is. I have been in meetings where it’s assumed that I know anything and everything tax-related because I’m a tax attorney. (Spoiler alert: I certainly do not.) And it can be dangerous for the taxpayer and the professional when the taxpayer asking about, say, an inheritance tax return, assumes that you’re also well-versed in natural gas or local resource manufacturing tax credits. And maybe you’re willing to get there—eventually. But setting those expectations for clients is crucial.
That leads to the second piece: What are you required to tell your clients?
This part feels like it’s about your clients, but it’s really about you. Here are some actionable steps that you can take to make sure that you set the right tone from the beginning:
- Write a great representation letter. Representation letters should never be an afterthought. While professionals have different communication styles, and states and regulatory bodies may have varying requirements, a representation letter should, at a minimum, clearly outline the fee structure and the scope of the work. That last bit is vital. It’s essential that a client understands when representation begins and ends. You might act as their “forever” accountant, lawyer, or adviser, but the actual representation likely involves a series of transactions, like advising on a particular matter or preparing a return for a specific period. Communicating those boundaries every time means that there is less room for confusion. For example, if your representation letter makes clear that you’re assisting with resolving a controversy matter for the 2003 tax year, it is not reasonable for the client to believe that you will also be providing tax advice for the 2022 tax year.
- Ask your insurer for recommendations. Professionals with malpractice and related insurance often pay their premiums and assume that the relationship stops there. But many insurance companies provide resources like sample representation letters (see again #1) and continuing education seminars focused on best practices. Much of this information is free—or free in that your premium covers the cost of the services—and available online.
- Keep clients informed. Professionals must keep clients informed about an ongoing matter, yet most ethics complaints hinge on a lack of communication. If we assume that representation is about offering expertise and advice so that the taxpayer can take action—like signing a return, opting into a disclosure, or appealing an assessment—withholding news or giving bad information isn’t helpful. So send the email. Make the call. Have the meeting.
- Provide general updates. Even if a specific matter has ended, you may wish to advise about beneficial changes in the law or opportunities like stimulus checks or Paycheck Protection Program loans. You can do this in many ways: newsletters, client alerts, social media campaigns—or simply passing along a great Bloomberg Tax article. Just be clear with your messaging. Sending an update doesn’t have to signal, “Hey, you need to take this action,” but rather, “Hey, you might need to reach out to me to find out whether you need to take this action.”
- Don’t just sit still. Not sure if you’re doing the right thing? Don’t stay quiet. If your firm or company has an ethics wizard on staff, make an appointment. If that’s not an option, find out who else might be available to help through your professional associations or trade groups. For example, I’m a member of the Pennsylvania Bar Association, which offers its members the opportunity to chat with ethics counsel.
Tax professionals can be many things—attorneys, accountants, advisers, and preparers—but we’re not mind readers or fortune tellers. And we don’t have to be. We do, however, need to be mindful of what the future can bring and plan accordingly.
This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.