Accountant Held Liable for Interest Expense from Tax Error

The South Dakota Supreme Court last week upheld a Circuit Court decision allowing a jury to award damages to Doug O’Bryan Contracting Inc. for interest expense on underpayment of taxes that resulted from an error made by his accountant. The state’s high court had not previously allowed recovery of interest expense in lawsuits against tax advisers, the Associated Press reports.

Bruce Ashland, a certified public accountant, understated O’Bryan’s income for 1995. The well-drilling company, located in Martin, South Dakota, incorporated in April 1995, and Ashland used the wrong method to calculate income for the first quarter of the year. When the error was discovered several years later, O’Bryan owed an additional $239,933 in taxes and about $50,000 in interest.

Ashland admitted the error and let the jury determine the damages but challenged the interest award, saying the O’Bryan had been able to use the money for business during the three years. Ashland said the company would have had to borrow money to pay the actual tax bill at a higher interest rate than what O’Bryan could pay when the error was discovered. The jury awarded damages for the interest of $39,038.

Interest expense was not part of the recent class action settlement by KPMG with former clients who had participated in abusive tax shelters. The settlement allowed the former clients to recover some of their transaction costs but not interest and penalties on additional tax owed, which the Internal Revenue Service (IRS) considers the taxpayer’s responsibility.

The IRS can impose up to $1,000 in fines on paid tax preparers for certain errors and violations of tax law, but it has collected only 11 percent of the 528 fines it has assessed since 2003. Agency officials say that investigating shelter abuses have had a higher priority than following up on fines, but they are now more focused on the problem, USAToday says. The Agency is prohibited by law from naming the firms and individuals who have been fined, unless it brings civil or criminal court action.

Many of those fined are among the 600,000 so-called unenrolled tax preparers who worked in the USA in 2003, according to USAToday, who are unregulated and have no training requirements. Increasing availability of tax software means “that literally anyone can get into the tax preparation business” without learning “anything about tax law”, said Nina Olson, National Taxpayer Advocate, according to the newspaper.

Senator Jeff Bingaman (D-N.M.) has sponsored a bill that will provide greater protection for taxpayers from paid tax preparer errors. The Senate bill would keep the confidentiality protection but will mandate registration and competency testing for preparers and raise penalties to $5,000 per return, USAToday says. Bingaman says that he would personally favor some sort of public disclosure.

Paul Cinquemani, director of government relations for the National Association of Tax Professionals, said that government licensing “has the potential to raise (the competency) bar. That’s a good thing.” He also wants the IRS to make a greater effort to collect penalties. “If the IRS enforced things better, it would have a chilling effect on some of the screwing around that’s going on out there,” he said, according to USAToday.

You may like these other stories...

IRS must take oath on Lerner emails: judgeMackenzie Weinger of Politico reported on Thursday that a federal judge ordered the IRS to explain under oath how it lost emails connected to Lois Lerner, the ex-IRS official at the...
The Republican-controlled House of Representatives passed a bill on Friday morning that would permanently extend the bonus depreciation tax break for businesses.The measure, HR 4718, which was crafted by Representative Pat...
The Republican-led House of Representatives is expected to pass a bill this week that would permanently extend the bonus depreciation tax break. But don’t expect President Obama to sign it.The Obama administration said...

Upcoming CPE Webinars

Jul 16
Hand off work to others with finesse and success. Kristen Rampe, CPA will share how to ensure delegated work is properly handled from start to finish in this content-rich one hour webinar.
Jul 17
This webcast will cover the preparation of the statement of cash flows and focus on accounting and disclosure policies for other important issues described below.
Jul 23
We can’t deny a great divide exists between the expectations and workplace needs of Baby Boomers and Millennials. To create thriving organizational performance, we need to shift the way in which we groom future leaders.
Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.