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.

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