California Accounting/CPA Malpractice Demand Letter

📋 What is Accounting Malpractice?

Accounting malpractice occurs when a Certified Public Accountant (CPA), tax preparer, or other accounting professional fails to exercise the degree of care, skill, and competence that reasonably competent practitioners would exercise under similar circumstances, resulting in financial harm to the client.

In California, CPAs and accounting professionals are held to professional standards established by the California Board of Accountancy, the AICPA Code of Professional Conduct, Generally Accepted Accounting Principles (GAAP), and Generally Accepted Auditing Standards (GAAS). Violations of these standards can form the basis of a malpractice claim.

Elements of a California Accounting Malpractice Claim

To succeed in an accounting malpractice case under California law, you must prove all four elements:

Duty of Care - A professional relationship existed (typically established by an engagement letter, payment for services, or reliance on advice)
Breach of Standard of Care - The accountant failed to comply with applicable professional standards (GAAP, GAAS, AICPA Code, California Accountancy Act)
Causation - The breach directly caused your financial harm
Damages - You suffered quantifiable financial losses (IRS penalties, back taxes, lost business value, etc.)

👍 Key Advantage: No Damages Cap

Unlike medical malpractice cases in California (which are subject to MICRA), accounting malpractice claims have no statutory cap on economic or non-economic damages. You can recover the full extent of your financial losses.

⚠ You're Still Liable to the IRS

Even if your CPA made errors on your tax return, YOU remain responsible to the IRS for your tax liability. You must pay the taxes, penalties, and interest - then pursue your CPA for reimbursement through a malpractice claim. Do not ignore IRS notices while pursuing your claim.

⚖ Legal Basis

California accounting malpractice claims are governed by multiple statutes, regulations, and professional standards. Understanding these provides the legal framework for your demand letter.

Key California Laws and Standards

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California Accountancy Act (Bus. & Prof. Code 5000-5158)

The primary statute governing CPA licensing, practice, and discipline in California. Establishes requirements for licensure, continuing education, and grounds for disciplinary action by the California Board of Accountancy.

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California Board of Accountancy Regulations (16 CCR 1-99)

Detailed regulations governing CPA conduct, including standards for attest engagements, independence requirements, peer review, and professional ethics. Violations can result in license suspension or revocation.

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AICPA Code of Professional Conduct

The American Institute of CPAs establishes ethical and technical standards including integrity, objectivity, due professional care, and compliance with professional standards. California CPAs must adhere to these standards.

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Generally Accepted Accounting Principles (GAAP)

The standard framework for financial accounting and reporting. CPAs preparing or auditing financial statements must ensure compliance with GAAP. Departure from GAAP without proper disclosure can constitute malpractice.

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Generally Accepted Auditing Standards (GAAS)

Standards governing audit procedures and the quality of audit work. Auditors must exercise due professional care, maintain independence, and follow prescribed procedures. Audit failures often involve GAAS violations.

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CCP Section 339(1) - Statute of Limitations

California's 2-year statute of limitations for professional negligence claims. The limitation period begins when you discover (or should have discovered) the injury and its negligent cause. Maximum 4-year outer limit from the date of the negligent act.

Statute of Limitations

California's statute of limitations for accounting malpractice is governed by CCP Section 339(1):

📅 Critical Deadlines

2 Years from Discovery: You must file within 2 years after you discover (or reasonably should have discovered) the accountant's negligence and your resulting harm
4-Year Maximum: Regardless of discovery, you cannot file more than 4 years after the date of the negligent act
Discovery Triggers: IRS audit notices, penalty assessments, or discovery of errors by a new CPA often start the clock
Tolling: Fraudulent concealment by the accountant may toll (pause) the limitations period

📈 Common Dispute Types

Accounting malpractice claims arise from various types of professional errors and negligence. This guide covers the most common scenarios.

💰 Tax Preparation Errors

Incorrect deductions, missed credits, math errors, failure to report income, wrong filing status, or missed deadlines causing IRS penalties, interest, and additional tax liability. Includes errors on individual, business, and estate tax returns.

🔍 Audit Failures

Failure to detect material misstatements, fraud, or irregularities in financial statements. Includes inadequate audit procedures, insufficient sampling, independence violations, and issuing clean opinions on materially misstated financials.

🔒 Failure to Discover Fraud

Missing obvious red flags of employee embezzlement, vendor fraud, or financial manipulation during audits or bookkeeping services. CPAs have a duty to design procedures reasonably likely to detect material fraud.

📈 Bad Business/Tax Advice

Negligent advice on business structure, tax planning, transactions, or investments causing unexpected tax liability, lost tax benefits, or business losses. Includes improper entity formation, bad M&A tax structuring, and aggressive positions.

Examples of Actionable CPA Errors

Failing to claim the Qualified Business Income deduction (Section 199A) for eligible S-corp income
Using wrong depreciation life for commercial property (39 years vs. 27.5 years)
Failing to file required international forms (FBAR, Form 8938, Form 5471)
Missing estimated tax payment deadlines causing underpayment penalties
Failing to properly characterize installment sale for tax purposes
Incorrectly advising on S-corp election timing, causing lost tax benefits
Missing red flags during audit that should have revealed employee embezzlement
Failing to verify inventory counts leading to materially misstated financials

💰 Recoverable Damages

California accounting malpractice claims can recover the full extent of financial losses caused by the CPA's negligence. There is no statutory cap on damages.

Damage Type	Description	Examples
IRS Penalties and Interest	All penalties and interest assessed by IRS or state tax authorities due to CPA errors	Accuracy penalties (20%), late filing penalties (5%/month), late payment penalties, FBAR penalties, interest on underpayment
Back Taxes Owed	Additional tax liability resulting from errors that would not have been owed with proper preparation	Disallowed deductions, unreported income corrections, recaptured credits
Lost Business Value	Diminution in business value caused by bad advice or failed audits	Lost financing opportunities, failed transactions, decreased company valuation
Cost of Corrective Accounting	Fees paid to another CPA to fix errors, amend returns, or respond to audits	Amended return preparation, IRS audit representation, restatement of financials
Lost Investment Opportunities	Returns lost when capital was diverted to pay unexpected tax liability	Lost investment returns, missed business opportunities, opportunity cost of capital

Sample Damages Calculation

📊 Example: Tax Return Errors Case

CPA failed to claim Section 199A deduction and made depreciation errors on rental property:

IRS deficiency assessment: $45,000
Accuracy-related penalty (20%): $9,000
Interest on underpayment: $6,200
State tax authority assessment: $8,500
Cost to hire new CPA for amended returns: $3,500
IRS audit representation fees: $7,800
Original CPA fees paid (refund): $2,500
Total Recoverable Damages: $82,500

👍 Professional Liability Insurance

Most CPAs carry Errors & Omissions (E&O) professional liability insurance, typically with coverage of $500,000 to $2 million or more. This insurance typically covers malpractice claims, making recovery more likely. Your demand letter should request insurance carrier information.

🖩 Accounting Malpractice Damages Calculator

Use this interactive calculator to estimate potential damages in your case. Enter your information below to get an estimate of recoverable damages.

Direct Financial Loss ($) Actual money lost or spent

Consequential Damages ($) Additional losses caused by the issue

Emotional Distress Level

Statutory Penalty Type

📈 Estimated Damages Breakdown

Direct Damages $0

Consequential Damages $0

Emotional Distress (Est.) $0

Statutory Penalties (Est.) $0

TOTAL ESTIMATED DAMAGES $0

Disclaimer: This calculator provides rough estimates for educational purposes only and does not constitute legal advice. Actual damages vary significantly based on specific facts, evidence strength, and many other factors. Consult with a qualified California attorney for an accurate case evaluation.

✅ Evidence Checklist

Building a strong accounting malpractice case requires comprehensive documentation. Gather these materials before sending your demand letter.

📋 Engagement Documents

✓ Engagement letter with scope of services
✓ Fee agreements and invoices paid
✓ All communications (emails, letters, notes)
✓ Written advice or recommendations provided

💰 Tax Documents

✓ Original tax returns as filed by CPA
✓ Amended returns and corrections
✓ IRS Account Transcripts showing assessments
✓ State tax returns and notices

📩 IRS Correspondence

✓ IRS notices (CP2000, deficiency notices)
✓ Audit letters and examination reports
✓ Penalty assessment notices
✓ Payment records for taxes/penalties paid

📈 Corrective Work

✓ New CPA's analysis identifying errors
✓ Bills for corrective accounting work
✓ Expert CPA opinion on breach of standards
✓ Calculation of damages and losses

🔒 Preserve All Evidence

Do not destroy any documents, emails, or communications with your accountant. These are critical evidence. Send a written request to the CPA for copies of all work papers and supporting documentation. Under California law, you are entitled to these records.

📝 Sample Demand Letter

Use this template to draft your accounting malpractice demand letter. Customize the highlighted portions for your specific situation.

CPA Malpractice Demand Letter

[YOUR NAME] [YOUR ADDRESS] [CITY, STATE ZIP] [DATE] VIA CERTIFIED MAIL, RETURN RECEIPT REQUESTED [CPA NAME], CPA [FIRM NAME] [ADDRESS] [CITY, STATE ZIP] Re: Demand for Compensation - Professional Negligence Tax Years: [YEARS] Client: [YOUR NAME / BUSINESS NAME] Dear [CPA NAME]: I am writing to demand compensation for professional negligence in connection with accounting services you provided to me, including the preparation of my [individual/business] tax returns for tax years [YEARS]. PROFESSIONAL RELATIONSHIP I engaged your firm to provide accounting services pursuant to the engagement letter dated [DATE]. Under this engagement, you were responsible for [describe scope - e.g., "preparing and filing my federal and California income tax returns based on information I provided, as well as providing tax planning advice"]. I paid your firm $[AMOUNT] for these services. BREACH OF PROFESSIONAL STANDARDS Your work fell below the standard of care required of certified public accountants under the California Accountancy Act (Business & Professions Code Section 5000 et seq.), AICPA Code of Professional Conduct, Generally Accepted Accounting Principles (GAAP), and applicable California Board of Accountancy regulations. Specifically: 1. [Specific error #1 - e.g., "You failed to claim the Qualified Business Income deduction under IRC Section 199A, despite my S-corporation income being clearly eligible. This deduction would have reduced my taxable income by approximately $85,000."] 2. [Specific error #2 - e.g., "You incorrectly calculated depreciation on my commercial rental property at 1234 Main Street, using a 27.5-year residential life instead of the correct 39-year life for commercial property, resulting in excessive depreciation deductions that have now been disallowed."] 3. [Specific error #3 - e.g., "You failed to file Form 8938 (Statement of Specified Foreign Financial Assets) despite having full knowledge that I maintained foreign bank accounts exceeding the reporting threshold, exposing me to substantial penalties."] These errors constitute a clear breach of the professional standard of care that a reasonably competent CPA would have exercised under the circumstances. RESULTING DAMAGES As a direct and proximate result of your negligence, I have suffered the following damages: - IRS deficiency assessment: $[AMOUNT] - Accuracy-related penalty (IRC 6662): $[AMOUNT] - Interest on underpayment: $[AMOUNT] - California FTB assessment: $[AMOUNT] - Cost to hire new CPA to correct errors: $[AMOUNT] - IRS audit representation fees: $[AMOUNT] - [Other damages]: $[AMOUNT] TOTAL DAMAGES: $[TOTAL] DEMAND I demand payment of $[TOTAL] within thirty (30) days of the date of this letter to fully compensate me for the damages caused by your professional negligence. Please immediately forward this letter to your professional liability (Errors & Omissions) insurance carrier. Within fourteen (14) days, please provide me with the following insurance information: - Insurance carrier name - Policy number - Claims contact name and phone number - Policy limits CONSEQUENCES OF NON-RESPONSE If this matter is not resolved within 30 days, I will: 1. File a formal complaint with the California Board of Accountancy requesting investigation and appropriate disciplinary action, including potential license suspension or revocation; 2. Report your conduct to the IRS Office of Professional Responsibility under Circular 230; 3. Initiate civil litigation against you in the appropriate California Superior Court for professional negligence, seeking full compensatory damages plus prejudgment interest, costs, and attorney's fees to the extent permitted by law. PRESERVATION OF EVIDENCE You are hereby directed to preserve all documents, work papers, electronic files, and communications related to your representation of me, including but not limited to engagement letters, tax returns, supporting schedules, correspondence, emails, and file notes. Destruction of such evidence may result in adverse inferences and sanctions. I am prepared to discuss resolution of this matter in good faith. Please contact me or have your insurance carrier's representative contact me within 14 days to discuss settlement. Sincerely, [YOUR SIGNATURE] [YOUR NAME] [PHONE NUMBER] [EMAIL ADDRESS] Enclosures: - IRS Notice [CP2000 / Deficiency Notice / etc.] - Original tax returns as filed - IRS Account Transcript - Amended return / corrected calculations - Invoices for corrective accounting work cc: California Board of Accountancy (by separate cover if no response received)

❓ Frequently Asked Questions

Common questions about California accounting and CPA malpractice claims.

What is the statute of limitations for CPA malpractice claims in California? ▼

California has a 2-year statute of limitations for accounting malpractice claims under CCP Section 339(1). The clock starts running from when you discovered (or should have discovered) the accountant's negligence and resulting harm. There is also a maximum 4-year outer limit from the date of the negligent act. IRS audit notices or penalty assessments often trigger the discovery date.

Can I sue my CPA for tax return errors that caused IRS penalties? ▼

Yes, you can sue your CPA for tax return errors if their negligence caused you to incur IRS penalties, interest, and additional taxes. You must prove the CPA breached the professional standard of care (GAAP/GAAS or AICPA standards), that the breach caused your damages, and quantify your losses including penalties, interest, back taxes, and cost of corrective accounting. The CPA's professional liability insurance typically covers such claims.

What damages can I recover in a California accounting malpractice case? ▼

In California accounting malpractice cases, you can recover: (1) IRS and state tax penalties and interest, (2) Additional taxes owed due to errors, (3) Lost business value from bad financial advice, (4) Cost of hiring another CPA to correct errors, (5) Lost investment opportunities, (6) Professional fees paid to the negligent accountant, and (7) Consequential business losses. Unlike medical malpractice, there is no cap on non-economic damages in accounting malpractice cases.

What professional standards govern California CPAs? ▼

California CPAs are governed by multiple standards: (1) The California Accountancy Act (Business & Professions Code Sections 5000-5158), (2) California Board of Accountancy regulations, (3) AICPA Code of Professional Conduct, (4) Generally Accepted Accounting Principles (GAAP), (5) Generally Accepted Auditing Standards (GAAS), and (6) IRS Circular 230 for tax practice. Violation of any of these standards can establish breach of the duty of care in a malpractice claim.

Should I file a complaint with the California Board of Accountancy? ▼

Filing a complaint with the California Board of Accountancy can be strategic leverage in your malpractice claim. The Board can investigate, issue citations, suspend or revoke CPA licenses, and impose fines. While a Board complaint won't directly compensate you, it creates pressure for settlement and documents the misconduct. Consider filing after your demand letter if the CPA doesn't respond, but consult with an attorney about timing as Board proceedings are public record.

Do I need an expert witness to prove accounting malpractice in California? ▼

Yes, in most California accounting malpractice cases, you will need expert testimony from another CPA to establish: (1) the applicable standard of care, (2) how the defendant CPA breached that standard, and (3) causation between the breach and your damages. The expert should be familiar with the specific area of practice (tax, audit, advisory) and preferably California-licensed. Courts rarely allow accounting malpractice claims to proceed without expert testimony unless the negligence is obvious to laypersons.

🚀 Next Steps

After sending your demand letter, here's what to expect and how to proceed.

Demand Letter Timeline

Day 1: Send Demand Letter

Mail via certified mail, return receipt requested. Keep copy of letter and mailing receipt.

Days 1-14: Insurance Notification

CPA should notify their E&O insurance carrier. Carrier assigns adjuster and begins review.

Days 14-21: Initial Response

You should receive response with insurance information and initial position on the claim.

Days 21-30: Investigation

Insurance company reviews records, may request additional documentation, evaluates liability.

Day 30+: Negotiation or Escalation

Settlement discussions if liability acknowledged. File Board complaint and prepare litigation if no response.

If No Response or Denial

File California Board of Accountancy Complaint
File online at cba.ca.gov. Include your demand letter, supporting documents, and a summary of the negligent conduct. Board investigations create pressure for settlement.
Report to IRS Office of Professional Responsibility
If the CPA violated Circular 230 (tax practice standards), file a complaint with the IRS OPR. This can result in suspension from practice before the IRS.
Consult a Professional Malpractice Attorney
Many attorneys offer paid consultations and handle these cases on contingency. An attorney can help evaluate your case, retain expert witnesses, and pursue litigation if necessary.
File Lawsuit in California Superior Court
If settlement is not possible, file a complaint for professional negligence in the appropriate California Superior Court. Filing fees are approximately $435-$450.

Get a Case Evaluation

Accounting malpractice cases require expert analysis of complex tax and accounting issues. Get a consultation with an experienced professional malpractice attorney.

Schedule Consultation

California Resources

California Board of Accountancy: cba.ca.gov - File complaints, verify licenses, view enforcement actions
AICPA: aicpa.org - Professional standards and ethics guidance
IRS Office of Professional Responsibility: irs.gov/tax-professionals/office-of-professional-responsibility - Circular 230 complaints
California Courts Self-Help: selfhelp.courts.ca.gov - Court forms and procedures