Accounting Malpractice Suit Over Trust Returns Gets Green Light

Accounting Malpractice Suit Over Trust Returns Gets Green Light
Accounting Malpractice Claim Can Proceed

No accounting firm wants an unhappy client. The only thing worse is a client that sues for malpractice. Henry Guy and John Moore were trustees of an estate. They hired a New York accounting firm, CPI Associates to prepare annual tax returns for the trust for 2012, 2013 and 2014.

After the beneficiary of the trust died, the trustees had the trusts finances and returns reviewed. They claim a large error was discovered requiring the trust to file amended returns. Along with the amended returns, the trust paid $4 million to the IRS. Of that sum, $243,494 was interest. The trust says it also cost them $360,000 in legal and accounting fees to correct the mistakes and amend their returns.

When CPI Associates refused to pay the interest and professional fees, the trustees filled a lawsuit.

According to the complaint,

“CPI and the Trustees were in a contractual relationship since the Trust’s formation, and CPI employees performed continued services for the Trust in their capacities as certified public accountants. The services contracted for, including income tax preparation and advice about entity treatment, were those normally performed by an accountant in the ordinary course of that profession. However, CPI’s services, including its preparation of the Trust’s 2012, 2013 and 2014 federal income tax returns, significantly departed from ordinary standards of care that an accountant in a similar situation would have displayed. CPI’s errors could have easily been avoided by plain readings of the tax code and regulations and by asking additional questions to the Trustees regarding the entities involved. These significant errors, upon which the Trustees relied, were both the direct and proximate cause of the damages suffered by the Trust.”

The suit seeks damages for accounting malpractice, negligent misrepresentation and breach of fiduciary. The trust claims that it is entitled not only to the $603,494 for interest and professional fees but also punitive damages.

Shortly after the complaint was filed, the accounting firm moved to dismiss citing a variety of legal theories. They say they owed no fiduciary duty to the trust, the trust waited too long to bring the lawsuit and that the trust failed to respond to their inquiries and questions.

On May 4th a federal judge in Manhattan ruled that much of the complaint could proceed.

U.S. District Court Judge Paul Gardephe did trim the negligent misrepresentation and breach of fiduciary duty claims but said the accounting malpractice claims could proceed.

Much of the court’s opinion centered on CPI Associates’ claim that the lawsuit was filed too late. Under New York law, there is a three year statute of limitations for accounting malpractice claims. A key issue, then, is when does the three year clock begin to run.

Courts say that claims accrue upon the client’s receipt of the accountant’s work

product since “this is the point that a client reasonably relies on the accountant’s skill and advice and, as a consequence of such reliance, can become liable for tax deficiencies.” In other words, under New York law, malpractice claims begin to accrue when the client gets the improper returns or advice.

CPI said the three year clock should have started back in 2013 when misclassified a Luxembourg entity in which the trust was a 40% owner. That was the error that ultimately caused the $4 million due the IRS.

Continuous Representation Doctrine Extends State of Limitations

Not so fast, said the court. New York and a majority of states recognize the “continuous representation doctrine.” In New York, the doctrine extends the statute of limitations only where there is ‘a mutual understanding of the need for further representation on the specific subject matter underlying the malpractice claim.” In other words, simply because the accounting firm continues to do work for the client doesn’t mean the statute of limitations is extended.

The court said at this early stage of the proceeding, whether or not the trust failed to answer CPI’s requests for information should be left for the jury or a motion to dismiss after discovery is complete.

The parties were ordered to submit a case management plan next month. Typically, after a motion to dismiss is denied the parties begin discovery. CPI continues to maintain that any damages incurred by the trust were the trust’s own fault. Had they provided proper information, the accounting firm would not have incorrectly prepared their returns.

It appears that CPI Associates merged into Farkouh, Furman & Faccio Certified Public Accountants & Advisors in December 2017 just months after the lawsuit was filed. Prior to the merger CPI specialized in serving high net worth individuals, trusts, and estates.

Can I Sue my Accountant?

Accountants are no different from doctors or lawyers. We all make mistakes. Whether the mistake or bad advice was intentional or innocent, accountants can be sued for their errors.

Whether your accountant fails to carry out his or her duty of care, or affirmatively and falsely misrepresents some material fact to you, accounting malpractice can take many shapes.

If your accountants botched an audit or gave you bad advice, give us a call. Very few lawyers handle accounting malpractice cases. Lawyers who claim take professional negligence cases are often more interested in general commercial litigation or medical malpractice cases.

We are different.

Think you have a case? Read our accounting malpractice information page. Then contact us online or by phone 877-858-8018.

The time period in which to sue an accountant for misconduct or malpractice is often quite limited. New York gives one just three years to sue but some states have even shorter deadlines. Call us today for a confidential, no fee consultation. All inquiries are protected by the attorney – client privilege and kept strictly confidential.

*We consider cases with losses of $1 million or more.

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