Opinion ID: 2631887
Heading Depth: 2
Heading Rank: 2

Heading: overview of accountant malpractice

Text: ¶ 17 This is the first time this court has addressed the question of when a claim for accountant malpractice arises in the context of an IRS audit. Although the number of cases from other jurisdictions addressing this issue is limited, a review of the existing case law is useful in understanding the various theories upon which other courts have relied. ¶ 18 Some states hold that the statute of limitation begins to run when the incorrect tax return is filed or the bad tax advice is given. See Ford's, Inc. v. Russell Brown & Co., 299 Ark. 426, 773 S.W.2d 90, 92-93 (1989); [6] Consolidated Mgmt. Servs., Inc. v. Halligan, 186 Ga.App. 621, 368 S.E.2d 148, 150 (1988). [7] These jurisdictions have not adopted a discovery rule for cases involving professional malpractice. Generally, of course, a taxpayer does not learn of a potential malpractice claim until the IRS conducts an audit. This line of cases is therefore problematic because the audit itself may not occur until after the statute of limitation has expired. ¶ 19 Other jurisdictions hold that the statute of limitation starts to run upon receipt of the thirty-day letter. See Isaacson, Stolper & Co. v. Artisan's Sav. Bank, 330 A.2d 130, 134 (Del.1974) (applying the discovery rule, the court held the statute began to run upon receipt of the initial notice of the examiner's findings indicating the proposed deficiency assessment from the IRS); Seebacher v. Fitzgerald, Hodgman, Cawthorne & King, P.C., 181 Mich.App. 642, 449 N.W.2d 673, 676 (1989) (same); [8] and Brower v. Davidson, Deckert, Schutter & Glassman, P.C., 686 S.W.2d 1, 3 (Mo.Ct.App.1984) (same). [9] In these cases the plaintiffs did not await the final decision of the Tax Court, nor did they continue to rely on their accountant's advice and representations. In our view, these cases do not establish a reasonable test for the accrual of an accountant malpractice action because receipt of the thirty-day letter does not establish tax liability. If a taxpayer disagrees with the proposed adjustment, he or she may pursue two appeals of right within the IRSwith the District Office and the Appeals Office. ¶ 20 The majority of jurisdictions hold that a cause of action for accountant malpractice accrues when the plaintiff receives the ninety-day letter; however, none of the cases noted herein involved an appeal to and a final judgment from the Tax Court. See International Engine Parts, Inc. v. Feddersen & Co., 9 Cal.4th 606, 38 Cal.Rptr.2d 150, 888 P.2d 1279, 1287 (1995); [10] Streib v. Veigel, 109 Idaho 174, 706 P.2d 63, 67 (1985); [11] LaMure v. Peters, 122 N.M. 367, 924 P.2d 1379, 1383 (N.M.Ct.App.1996); [12] Snipes v. Jackson, 69 N.C.App. 64, 316 S.E.2d 657, 659 (1984); [13] Wynn v. Estate of Dick Holmes, 815 P.2d 1231, 1234 (Okla.Ct.App.1991); [14] Murphy v. Campbell, 964 S.W.2d 265, 270 (Tex.1997); [15] Mills v. Garlow, 768 P.2d 554, 558 (Wyo.1989). [16] See also Michael J. Weber, Annotation, Application of Statute of Limitations to Actions for Breach of Duty in Performing Services of Public Accountant, 7 A.L.R.5th 852, 914-920, 1992 WL 767602 (2000). The courts in these jurisdictions concluded that the exposure to liability disclosed by the IRS in the ninety-day letter was the injury that formed the cause of action. This is sound reasoning given that in all these cases the plaintiffs did not complete an appeal of right with the Tax Court; instead they either settled or accepted liability. In addition, none of the plaintiffs alleged ongoing reliance on the representations of their accountant(s) during their appeals. In this case, by contrast, the ninety-day letter only provided notice of a potential legal injury; it was not the final decision. The Clarks, on defendants' advice, chose to appeal to the United States Tax Court; if that court had not ultimately found liability, the Clarks would not have a malpractice claim. ¶ 21 In Peat, Marwick, Mitchell & Co. v. Lane, the question before the court was precisely the same as presented in this case: whether the commencement of the limitation period in accounting malpractice occurs when the taxpayer receives the ninety-day letter or when the Tax Court renders its final decision. See 565 So.2d 1323, 1325 (Fla.1990). As in this case, the plaintiffs in Peat Marwick believed that their accountant's advice was correct, and they in fact proceeded on that advice to challenge the IRS's determination. Id. at 1327. The court premised its analysis on the rule that a cause of action for negligence does not accrue until the existence of a redressable harm or injury has been established and the injured party knows or should know of either the injury or the negligent act. Id. at 1325. In concluding that it would be inequitable for the complaint to be dismissed, the court evaluated the facts as follows: If we were to accept [Peat Marwick's] argument [that an IRS deficiency determination conclusively establishes an injury upon which to base a professional malpractice action], the Lanes would have had to have filed their accounting malpractice action during the same time that they were challenging the IRS's deficiency notice in their tax court appeal . . . . In the tax court, the Lanes would be asserting that the deduction Peat Marwick advised them to take was proper, while they would simultaneously argue in a circuit court malpractice action that the deduction was unlawful and that Peat Marwick's advice was malpractice. To require a party to assert these two legally inconsistent positions in order to maintain a cause of action for professional malpractice is illogical and unjustified. Id. at 1326. The court then held that consistent with the holdings of numerous attorney malpractice cases, . . . until the Tax Court action was final, the Lanes did not have an action for malpractice. Id. The court explained that [t]he Lanes did not suffer redressable harm until the tax court entered judgment against them. Until that time, the Lanes knew only that Peat Marwick might have been negligent; however, if the tax court did not uphold the deficiency, the Lanes would not have a cause of action against Peat Marwick for accounting malpractice. Id. at 1325. We find the reasoning of the Florida Supreme Court persuasive.