Humbling moments: Words to the wise, “Put it in writing”

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By W. Wesley Marston

"To communicate through silence is a link between the thoughts of man.” – Marcel Marceau

The silent approach to communication might be fine for a mime, but it can lead to trouble for accountants. While the importance of engagement letters is stressed repeatedly, written communication often is also advisable during the course of the engagement.

One area where lack of written communication repeatedly opens the door for claims is preparation of estate tax returns. Typically, the executor either fails to contact the accountant by the due date or fails to provide the information necessary to complete an accurate return in a timely manner.

The trouble usually begins when the executor discovers the possibility of personal liability for the penalties. Placed in such a predicament, the executor’s recollection of facts is often less than accurate.

The question is not, “What did the accountant do wrong?” It is, “What will the executor claim that the accountant did wrong in an attempt to avoid liability?” If the accountant does not have evidence to disprove the allegations, it becomes a swearing contest.

Keep in mind that in a lawsuit, verbal communication may be the equivalent of silence. A single letter probably would have prevented a lawsuit against Adele Accountant:

Adele’s long-time tax client, Danielle Decedent, passed away on Date 1. The estate tax return was due on Date 2.

In accordance with Decedent’s wishes, the Acme Brokerage trust department was named executor of the estate, and Adele was engaged to prepare Decedent’s estate tax return. Adele advised Acme’s trust officer of the information that Acme needed to provide for Adele to prepare the 706.

Decedent’s estate included a large collection of expensive Native American pottery, jewelry, and kachina dolls, so appraisals were required. Acme did not contact Adele until one week prior to Date 2 and still did not have the required appraisals.

Adele obtained an extension and informed Acme that the return was due on Date 3. Two weeks after Date 3, Adele contacted Acme to advise the brokerage that, due to its failure to provide the requested information in a timely manner, the return was now late.

Acme’s response was to terminate Adele’s services and to file suit against her for the subsequent IRS late filing penalty assessment in the amount of $200,000.

Acme knew that the appraisals were necessary for preparation of the return. Acme also knew that the return was due on Date 3. Although Adele had previously discussed those topics with Acme, she had not memorialized those conversations in writing. Thus, she had no proof of the prior communications.

Had Adele sent a reminder letter noting the requested information and the date by which she would need the information to file the return in a timely manner, it is likely that Acme would not have filed the suit.

Is there a duty to tell someone a fact that they already know? Perhaps not, but without evidence that the information had been conveyed, it is a jury question. Due to the high costs and risks associated with a jury trial, it was prudent for Adele to settle the case.

Similarly, executors who fail to contact an accountant until after the due date have, with surprising regularity, claimed that the engagement began well before the due date. A letter at the outset stating the undisputed (at the time) fact that the accountant was not engaged until after the due date of the return may appear to be unnecessary. However, it could be the key to avoiding a future claim. Without such a letter the accountant still has defenses, but if such a communication exists, the executor probably will not even make such an allegation.

The lesson to be learned from Adele’s situation is applicable to other types of engagements as well. If there had been any doubt in Adele’s mind as to whether Acme was aware of the impending due date, she probably would have sent a reminder letter. However, Adele learned that sometimes it is wise to send a letter even when it states what, at the time, is obvious to all parties.

Perhaps the lesson itself is obvious, something that all of us already know, but sometimes we need a reminder, too.

About the author:

W. Wesley Marston, J.D., LL.M., AIC, is assistant vice president – claims at CPA Mutual Insurance Co.

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