Accountant & Tax Preparer Malpractice Demand Letters

CPA Negligence, Tax Return Errors, Audit Failures & Financial Advisor Misconduct

Accountant Malpractice Overview
💼 What Is Accountant Malpractice: Accountant malpractice occurs when a CPA, tax preparer, bookkeeper, or financial professional fails to exercise the degree of care, skill, and competence that reasonably competent practitioners would exercise, resulting in financial harm to the client.
Key Elements of Accountant Negligence
  1. Duty: Professional relationship existed (engagement letter, payment, reliance on advice)
  2. Standard of Care: GAAP (Generally Accepted Accounting Principles), GAAS (Generally Accepted Auditing Standards), or applicable professional standards
  3. Breach: Accountant failed to comply with professional standards
  4. Causation: Breach caused financial harm (IRS penalties, audit deficiencies, business losses)
  5. Damages: Quantifiable financial losses, penalties, interest, corrective costs
Types of Accounting Professionals
Professional Licensing Standard of Care Regulatory Body
CPA (Certified Public Accountant) State-licensed GAAP, GAAS, AICPA Code of Professional Conduct State Board of Accountancy, AICPA
Enrolled Agent (EA) IRS-licensed Circular 230, Treasury Regulations IRS Office of Professional Responsibility
Tax Preparer (Non-credentialed) PTIN required Reasonable care, Circular 230 IRS (limited oversight)
Bookkeeper Generally unlicensed Reasonable care appropriate to services None (contract law applies)
Statute of Limitations
State Time Limit Key Notes
California 2 years from discovery, max 4 years from act CCP § 339(1) - professional negligence
New York 3 years from act (6 years for breach of contract) CPLR § 214(6); continuous representation tolling may apply
Texas 2 years from breach or discovery Discovery rule applies
Florida 2 years from discovery, 4-year repose Statute of repose limits late discovery claims
⚠️ IRS Assessment Period: The IRS generally has 3 years to assess additional taxes (6 years for substantial understatement, unlimited for fraud). Your malpractice claim may not ripen until the IRS assessment is finalized.
CPA Malpractice Claims
Common CPA Malpractice Scenarios
Category Examples Typical Damages
Tax Return Errors Incorrect deductions, missed credits, math errors, wrong filing status, failure to report income IRS penalties, interest, back taxes, amended return costs
Missed Deadlines Late filing, missed extension deadlines, failure to make estimated payments Late filing penalties (5%/month up to 25%), late payment penalties
Improper Tax Advice Aggressive positions without disclosure, illegal tax shelters, incorrect entity structure advice Penalties, criminal exposure, restructuring costs
Audit Representation Failures Poor audit defense, failure to respond to IRS notices, inadequate documentation Larger assessment than warranted, penalties for non-compliance
Financial Statement Errors Misstated financials used for loans, investments, or business decisions Lost financing, investment losses, business damages
Business Transaction Advice Incorrect M&A tax structuring, bad S-corp election advice, improper asset basis Unexpected tax liability, lost tax benefits
AICPA Code of Professional Conduct

CPAs are bound by the AICPA Code, which requires:

  • Integrity: Honest and candid within constraints of client confidentiality
  • Objectivity: Free from conflicts of interest
  • Due Care: Competent services with diligence
  • Compliance with Standards: GAAP, GAAS, and applicable regulations
  • Confidentiality: Protection of client information
Evidence for CPA Malpractice Claims
  • Engagement letter: Scope of services, fee agreement, responsibilities
  • Tax returns (as filed): Original returns prepared by CPA
  • Amended returns: Corrections made after discovering errors
  • IRS notices: CP2000, audit letters, deficiency notices
  • IRS transcripts: Account transcripts showing assessments, penalties
  • Communications: Emails, letters showing advice given
  • Work papers: CPA's supporting documentation (may require subpoena)
  • Expert opinion: Another CPA opining on breach of standards
🚨 Preserve Everything: Do not destroy any documents, emails, or communications with your accountant. These will be critical evidence. Request copies of all work papers from the accountant.
Tax Preparer Errors & Fraud
Non-CPA Tax Preparer Issues

Many taxpayers use non-credentialed preparers (H&R Block, Jackson Hewitt, local preparers). These preparers owe duties under:

  • Circular 230: Treasury rules governing practice before IRS
  • IRC § 6694: Preparer penalty provisions
  • State consumer protection laws: Unfair/deceptive practices
  • Contract law: Breach of service agreement
Common Tax Preparer Problems
Issue Description Your Rights
Inflated Refunds Preparer claims fake deductions/credits to inflate refund (and their fee) You're liable to IRS; preparer may face penalties; possible fraud claim
Refund Anticipation Loans High-fee loans against expected refund; refund then denied Still owe loan; may have TILA/consumer protection claims
Ghost Preparers Preparer doesn't sign return (illegal); you can't find them when problems arise IRS still holds you liable; difficulty pursuing preparer
Identity Theft Preparer steals refund or uses your info fraudulently Criminal complaint; civil fraud claim; IRS identity theft affidavit
Incorrect W-2/1099 Entry Data entry errors causing underreporting Preparer liable for penalties if due to their negligence
IRS Preparer Penalties (IRC § 6694)

Preparers can be penalized by the IRS for:

  • § 6694(a): $1,000 or 50% of fee for unreasonable positions
  • § 6694(b): $5,000 or 75% of fee for willful/reckless conduct
  • § 6695: Various penalties for procedural failures (not signing, not providing copy)

You can report preparer misconduct to IRS using Form 14157.

State Consumer Protection

Many states have specific tax preparer regulations:

  • California: CTEC registration required; bond required; penalty provisions
  • New York: Registration required; $50,000 bond for RALs
  • Oregon: Licensing and continuing education required
  • Maryland: Registration and consumer protections
⚠️ You're Still Liable: Even if your preparer made the error, YOU are responsible to the IRS for your tax liability. You must pay the tax; your remedy is to sue the preparer for damages.
Audit & Financial Statement Failures
Auditor Malpractice

CPAs performing audits owe duties under GAAS (Generally Accepted Auditing Standards). Common audit failures include:

  • Failure to detect fraud: Missing obvious red flags, inadequate testing
  • Inadequate procedures: Insufficient sampling, poor documentation
  • Independence violations: Conflicts of interest affecting objectivity
  • Incorrect audit opinion: Unqualified opinion when qualified/adverse warranted
  • Failure to communicate: Not reporting material weaknesses to management/board
Third-Party Reliance (Privity Issues)
⚖️ Who Can Sue: Historically, only clients could sue accountants. Modern rules vary by state:
  • Near-privity (NY Ultramares rule): Third party must be in relationship approaching privity
  • Foreseen class (Restatement): Accountant liable to class of persons they knew would rely
  • Foreseeable users (CA - some cases): Broader liability to reasonably foreseeable users
Financial Statement Reliance Damages
Who Relied How They Were Harmed Potential Recovery
Lender Made loan based on overstated financials; borrower defaulted Loan losses, collection costs
Investor Invested based on misstated revenue/assets Investment losses, rescission
Acquirer Paid inflated purchase price based on audited financials Overpayment, transaction costs
Business owner Made decisions based on incorrect internal financials Business losses from poor decisions
Sarbanes-Oxley & Public Company Audits

For public company audits, additional standards apply:

  • PCAOB standards: Public Company Accounting Oversight Board rules
  • SOX § 404: Internal control attestation requirements
  • SEC enforcement: SEC can bring actions against auditors
  • Securities fraud: Investors may have Rule 10b-5 claims
Sample Demand Letters
Demand Letter: CPA Tax Return Errors
[YOUR NAME] [YOUR ADDRESS] [DATE] VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED [CPA NAME], CPA [FIRM NAME] [ADDRESS] Re: Demand for Compensation - Tax Return Malpractice Tax Years: [YEARS] Client: [YOUR NAME / BUSINESS NAME] Dear [CPA NAME]: I am writing to demand compensation for professional negligence in the preparation of my [individual/business] tax returns for tax years [YEARS]. BACKGROUND: I engaged your firm to prepare my tax returns pursuant to the engagement letter dated [DATE]. You were responsible for [describe scope - e.g., "preparing and filing my federal and California income tax returns based on information I provided"]. NEGLIGENT CONDUCT: Your preparation of my returns fell below the standard of care required of certified public accountants. Specifically: 1. [Specific error #1 - e.g., "You failed to claim the Qualified Business Income deduction under IRC § 199A, despite my S-corporation income being eligible"] 2. [Specific error #2 - e.g., "You incorrectly calculated depreciation on my rental property, using a 27.5-year life instead of the correct 39-year life for commercial property"] 3. [Specific error #3 - e.g., "You failed to file Form 8938 (FBAR) despite knowing I had foreign accounts exceeding the reporting threshold"] RESULTING HARM: As a direct result of your negligence, I have suffered the following damages: - IRS deficiency assessment: $[amount] - Accuracy-related penalty (20%): $[amount] - Interest on underpayment: $[amount] - Cost to hire new CPA to amend/fix: $[amount] - [State tax authority] assessment: $[amount] - FBAR penalty: $[amount] TOTAL DAMAGES: $[TOTAL] DEMAND: I demand payment of $[TOTAL] within thirty (30) days of this letter. Please forward this letter to your professional liability insurance carrier immediately. Provide me with the carrier name, policy number, and claims contact information within 14 days. If this matter is not resolved within 30 days, I will file a complaint with the [State] Board of Accountancy and pursue civil litigation for professional malpractice. Sincerely, [YOUR NAME] Enclosures: - IRS Notice CP2000 / Deficiency Notice - Original tax returns as filed - IRS Account Transcript - Amended return / corrected calculations
Demand Letter: Tax Preparer Fraud
[YOUR NAME] [YOUR ADDRESS] [DATE] VIA CERTIFIED MAIL [TAX PREPARER / COMPANY NAME] [ADDRESS] Re: Demand - Fraudulent Tax Preparation / Consumer Protection Violation Tax Year: [YEAR] Dear [PREPARER]: I am writing regarding the fraudulent tax return you prepared for me for tax year [YEAR]. FACTS: On [date], I visited your office to have my tax return prepared. I provided you with my W-2 showing wages of $[amount] and legitimate deductions totaling approximately $[amount]. You prepared and e-filed a return claiming: - [False deduction #1, e.g., "Business expenses of $8,500 - I do not own a business"] - [False deduction #2, e.g., "Education credits of $2,500 - I was not enrolled in school"] - [False item #3, e.g., "Earned Income Credit - I do not qualify based on my income"] These claims were false. You did not ask me about these items and I did not authorize them. You inflated my refund to increase your fee (which was [percentage] of my refund). IRS CONSEQUENCES: The IRS has now: - Disallowed the fraudulent deductions/credits - Assessed additional tax of $[amount] - Assessed accuracy-related penalties of $[amount] - Assessed interest of $[amount] - [Banned me from claiming EITC for 2/10 years] TOTAL IRS LIABILITY: $[amount] Additionally, you charged me $[fee] for this "service." LEGAL VIOLATIONS: Your conduct violates: - IRC § 6694 (preparer penalties for unreasonable positions) - IRC § 6695 (failure to furnish copy, failure to sign) - [State] Business and Professions Code § [XXX] (unfair business practices) - [State] Civil Code § [XXX] (fraud, misrepresentation) - California Tax Education Council (CTEC) regulations [if CA] DEMAND: I demand payment of $[total damages + fee refund + treble damages if applicable] within twenty-one (21) days. If payment is not received, I will: 1. Report you to the IRS using Form 14157 (Tax Return Preparer Complaint) 2. File a complaint with [State Attorney General / Consumer Protection Office] 3. Report you to CTEC [if California] 4. File a civil lawsuit for fraud and violation of consumer protection statutes Sincerely, [YOUR NAME]
Attorney Services
Tax or Accounting Problem Caused by Your CPA?

Accountant malpractice cases require understanding of both tax law and professional standards. Get experienced guidance on your claim.

Request Consultation
Services Offered
  • Case Evaluation: Assessment of whether you have viable malpractice claim
  • Damage Calculation: Quantifying your losses (penalties, interest, corrective costs)
  • Demand Letter Drafting: Professional demand to accountant and their insurer
  • Board of Accountancy Complaint: Filing disciplinary complaint if warranted
  • IRS Form 14157: Reporting preparer misconduct to IRS
  • Litigation: Civil lawsuit for professional negligence or fraud
What to Bring to Consultation
  • Engagement letter with accountant
  • Tax returns as originally filed
  • All IRS notices (CP2000, deficiency notice, etc.)
  • IRS account transcripts
  • Amended returns or corrected calculations
  • All communications with accountant (emails, letters)
  • Receipts/invoices for fees paid
  • Documentation of any payments made to IRS
⏰ Timing Matters: California has a 2-year statute of limitations from discovery. If you've received an IRS notice or discovered errors, consult an attorney promptly.

Accountant and Tax Preparer Malpractice — What You Need to Know

CPAs, enrolled agents, and tax preparers owe professional duties to their clients. When they make mistakes—filing incorrect tax returns, missing deductions, failing to identify audit risks, or providing negligent financial advice—clients can suffer significant financial harm including IRS penalties, interest, back taxes, and lost tax benefits. Accountant malpractice claims require proving the professional breached the standard of care and that breach directly caused measurable damages. Unlike some professional liability cases, accountant malpractice often involves concrete financial losses that are relatively easy to calculate.

Common Accountant and Tax Preparer Errors

Elements of an Accountant Malpractice Claim

To succeed in an accountant malpractice case, you must prove four elements: (1) duty—the accountant had a professional relationship with you and owed you a duty of care; (2) breach—the accountant failed to meet the professional standard of care applicable to CPAs or tax preparers; (3) causation—the breach directly caused your harm (not some independent factor); and (4) damages—you suffered actual financial loss as a result. Expert testimony from another CPA is typically required to establish the standard of care and how it was breached. IRS notices, penalty assessments, and comparison of what should have been filed versus what was filed provide concrete damage evidence.

What You Can Recover in Accountant Malpractice Cases

Demand Letters for Accountant Malpractice

A demand letter to an accountant or CPA should document the specific errors (with supporting IRS notices, corrected returns, or expert analysis), calculate the financial damages you suffered, and demand compensation. Most accountants carry professional liability (E&O) insurance, so the demand letter often triggers an insurance claim and settlement negotiations. Set a clear deadline (14-21 days) and state you will file a complaint with the state CPA board and pursue litigation if not resolved. The threat of a licensing complaint adds significant leverage, as disciplinary proceedings can result in license suspension or revocation.