Pretty much everyone knows that if you fail to file tax returns the IRS will come looking for you. It might take a year or more but Uncle Sam will find you and the penalties will be stiff. If you intentionally failed to file, the penalties can include prison. A case being played out in the Philadelphia Court of Common Pleas examines what happens when it’s your accountant who failed to file returns.
Purolite v. Citrin Cooperman & Company
Purolite is a Pennsylvania based chemical company. They hired Citrin Cooperman in 2007 as their corporate accountants. A lawsuit filed by Purolite says Citrin falsely represented that they had filed all tax returns for 2013 and 2017 when in fact, none had been filed. The lawsuit also names several partners of the accounting firm.
How could a national accounting firm not file returns for a corporate client for five years? Purolite says,
“In hindsight, Defendants’ lies and other misconduct directed at Plaintiffs should not be a surprise. Citrin is an organization that lacks a moral compass. It has a shameful history of failing to file client tax returns and lying about it. An important partner in the firm was convicted of larceny and tax fraud. Another partner, who managed the Philadelphia office, helped funnel Citrin clients to investment funds – operated by his girlfriend now under federal indictment – that were part of a Ponzi scheme.”
The accounting firm was caught when another accounting firm was hired to file the company’s 2018 returns. When the new accountants contacted the IRS to obtain old records, they discovered no returns had been filed for years. In fact as early as 2010 some returns had not been properly filed.
If that isn’t bad enough, the company says Citrin destroyed its work papers making reconstructing the missing returns even more difficult. As a result, Purolite has suffered “irreparable harm” and wants tens of millions of dollars in damages.
Purolite says that Citrin agreed for many years to file and pay any taxes due but never did so. Ultimately Purolite sued Citrin Cooperman and the present and former individual accountants at the firm they say were responsible for the fraud.
According to their complaint, Citrin “failed to exercise the requisite professional care and skill, and negligently departed from the professional standards applicable to tax preparers and accountants, in their conduct as accountants to Purolite and Aqua by, among other things: failing to file Purolite’s tax returns for the years 2013 through 2017.” The complaint also alleges the accounting firm is guilty of gross negligence, fraudulent representation, fraudulent concealment and breach of contract. In addition to its actual damages Purolite also wants their former accountants to return all documents given them to complete their taxes and to pay at least $10 million in punitive damages.
And where did the money go? Purolite says they paid all taxes their accountants said were due but the IRS never received returns or money. We know that a former Citrin partner, Matthew Weber, was convicted of theft and tax fraud after stealing the tax payments made by his clients. Time will tell if that is what also happened to Purolite’s money.
The accounting firm denies the allegations.
Accounting Malpractice and Unfiled Returns
Assuming that Purolite’s accusations are true, what is the liability of Citrin Cooperman? To answer that question, one must first look at the engagement letters between Purolite and the accounting firm. Although some of those are alleged to be “missing” or forged, it is readily apparent that Citrin agreed to complete the company’s tax returns and had been doing so for years. They also billed for tax preparation.
We say the accounting firm is liable for any damages suffered by Purolite and its owners. By any definition, Citrin failed in its duty of care to the company. And simply isn’t relevant if the misdeeds were the result of a rogue employee or not. The accounting firm is responsible for its employees and agents.
Thankfully Citrin is a large firm and probably has both deep pockets and good insurance. The bad publicity can’t be good for business but the firm is still in business.
Cirtin’s professional malpractice insurance probably pays for the damages associated with recreating and filing the company’s returns. We believe that the insurance should cover all damages suffered by Purolite but expect that their insurance company will balk at paying.
Most professional malpractice insurance excludes intentional and criminal acts. Failing to file a return may be negligence (accounting malpractice) but lying to the client and stealing tax payments could be considered intentional.
It’s now going on two years since the scandal broke and Purolite continues to suffer. Whether Citrin or its insurance carrier must pay, it is unacceptable that the victim is still waiting to be made whole.
Preventing Future Mistakes
Most unfiled returns are mistakes. Rarely do we see a case where the client of an accounting firm say that many years of returns were never filed and money is missing.
Here are our suggestions to keep you from becoming a victim of a similar situation.
First, make sure that your accountant has professional malpractice insurance. And while you are at it, make sure it isn’t a minimal policy that only offers $50,000 of coverage.
We know from this case that insurance may or may not cover all losses but it should cover at least some of the losses.
The alleged fraud in this case went on for years. One way of preventing that is periodically checking with the IRS to ensure that all returns have been filed. By obtaining copies of returns directly from the IRS, you can also ensure that the returns filed match the copies you received from the accountants. (A variation of the scheme alleged here is for an accountant to create one set of returns for the IRS and a different set for the client. Invariably the dishonest accountant underreports the tax due and pockets the difference.)
Did Your Accountant Fail to File Returns?
Despite taking reasonable protections, you may still find that your accountant failed to file returns on your behalf or worse, failed to file your returns and pocketed the tax payments.
Believe it or not, even if you thought you paid the taxes by giving the money to your accountant, the IRS still requires you to pay “again” and can levy significant penalties and interest. As soon as you suspect that your accountant has failed to file or pay your taxes, verify with the IRS what has been filed and what they say you owe.
Assuming there is a problem, get legal help immediately. Interest and penalties continue to accrue even though you reasonably believed your returns were filed and / or your returns were filed.
For more information, please visit or accounting malpractice information page. To see if you have a case, contact us today. All inquiries kept in strict confidence. For more information, contact attorney Brian Mahany online, by email at [hidden email] or by telephone at (877) 858-8018.
(We consider cases with an out of pocket loss of $500,000 or more. Often we can help you find someone in your area if we can’t take your case.)