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War Story 113

#113: Difficult Client; Tax Planning and Return Preparation Services — A client with high turnover and disorganization in its accounting and financial staff is not only frustrating, but also a liability exposure if documentation is not thorough.

The following War Story is based partly on CAMICO claims files and partly on risk exposures facing CPAs from the Tax Cuts and Jobs Act (the “Tax Act”) passed into law in December 2017. All names have been changed.

Thomas and Lucy Welch owned a successful commercial table grape growing business, Vitality Vineyards, and had recently converted some of their vineyards over to wine grapes. This spurred exceptional new business growth that prompted them to acquire more vineyard properties, which in turn required them to hire more employees and purchase more equipment to keep up with the increasing demand for grapes.

When their accountant, Ed Beatty, retired, they had been referred to John Williams, CPA, by another business owner to provide tax planning services and prepare their tax returns. Williams spoke with Beatty, who had nothing but good things to say about the Welches, but warned Williams that there had been some high turnover and disorganization in Vitality’s accounting and financial staff, which could present some challenges as the company became busier as a result of its recent growth. The tax law changes and opportunities brought about by the Tax Act would make those challenges even more complex.

Williams was interested in bigger clients in the vineyard and wine business, though, so he decided to accept Vitality in hopes of attracting similar clients. He sent an engagement letter that addressed his expectations of Vitality to provide timely information and documents, and the letter outlined terms of fee collections and the consequences of late payment. The client returned a signed copy of the letter, as requested.

When Williams requested information from Vitality’s accounting and financial staff, he found that the staff and the company’s records were inadequate and poorly organized. He advised Vitality’s CFO and accounting staff about opportunities related to new deductions and strategies related to the Tax Act, but the CFO and staff seemed too overwhelmed by their current problems to devote enough attention to understanding the tax planning issues.

Williams documented his advice on the potential opportunities in a lengthy, detailed memo, citing IRS instructions, forms and examples of deductions and deduction limitations. He sent the memo to the CFO and Vitality management, but was frustrated by their lack of responsiveness. He was also frustrated by Vitality’s poor bookkeeping and slow payment of his invoices. Williams communicated in writing to Vitality’s management about his difficulties in obtaining information, documents, responses and payments.

He approached another company at a wine industry event with his ideas for tax deductions and was engaged almost on the spot. The company was so much better organized than Vitality that Williams disengaged from Vitality after one year of tax return preparation.

A year after that, Williams was sued by Vitality, alleging that he had caused Vitality to miss more than $100,000 worth of tax deductions on the company’s federal and state tax returns for the year he had prepared them.
After reading the following questions, select the one answer that is the best response.

1. How had the CPA protected himself against the allegations in this claim scenario?


He had sent an engagement letter detailing the client’s responsibilities and received a signed copy of it back from the client.


He had documented the advice he had discussed with the client as well as the difficulties in obtaining documents, information, responses and payments.


He had performed adequate client screening for this client.


a. and b.


a., b. and c.

2. What was the main tip-off from the prior CPA that the client might be a problem?a.

The client was experiencing exceptional growth at a time when tax law changes would pose extra risk.


The client had experienced high turnover in its accounting and financial staff.


a. and b.


1. Answer a. Correct, but there’s a better answer.

Getting a signed engagement letter from the client clarifies that the client understood and accepted the responsibilities and obligations as set forth in the letter. This becomes a crucial part of the CPA’s defense if the client claims that the responsibilities were not understood. Sample engagement letter templates can be found in the Engagement Letter Resource Center on the CAMICO Members-Only Site.

Answer b. Correct, but there’s a better answer.

Documentation of advice provided by the CPA, and of difficulties in obtaining information, are also crucial in defending the CPA against allegations. CPAs are generally considered to be experts in documentation, and falling short of that expectation may cause CPAs to be viewed as falling below the standard of care for the services rendered. In some engagements, CPAs should obtain the client’s written consent to implement decisions made, often done with an “informed consent” letter that provides the CPA’s advice and obtains the client’s understanding and consent.

Answer c. Incorrect.

Client screening for this client was not adequate, and the CPA chose to ignore the prior CPA’s warning about high staff turnover and disorganization. A “Client Assessment Checklist” is available in the Engagement Letter Resource Center on the CAMICO Members-Only Site in the “Getting Started” section.

Answer d. Correct, and the best answer.

Getting a signed engagement letter and documenting the engagement details are essential lines of defense against allegations. In some cases, the client will agree to dismiss the lawsuit when faced with the documentation in support of the CPA.

Answer e. Incorrect, as explained in Answer c.

Client screening for this client was not adequate, and the CPA chose to ignore the prior CPA’s warning about high staff turnover and disorganization.

2. Answer a. Incorrect.

The engagement may pose extra risk, but extra risk can be managed with sound practices such as client screening, signed engagement letters, and thorough documentation. The engagement may also pose extra opportunities for the client, which may result in extra opportunities for the CPA, such as additional service offerings in a future engagement.

Answer b. Correct.

High client staff turnover is a red flag. Further client screening may have also revealed that the client’s business and accounting records were inadequate and disorganized.

Answer c. Incorrect, as explained in Answer a.

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