In the case of Goei, et al v. CBIZ, Inc. et al[1] a U.S. District Court ruled that a CPA firm could not rely on alleged poor representation by the client’s attorneys to reduce damages the firm might owe due to the taxpayers being subjected to failure to file penalties. While the ruling is based on specific Rhode Island law issues, it outlines the risks CPA firms face when dealing with filing issues.

The taxpayer in question lived in Switzerland but had U.S. filing responsibilities. He had engaged an individual CPA in 2007 to advise him on U.S. tax issues and handle tax filings. The CPA joined the CPA firm in 2008, bringing Mr. Goei along with him.

The preparation of Mr. Goei’s 2014 income tax return was proving to be an involved situation with not all information immediately available as the October 15, 2015 extended due date approached. The opinion explains the situation as follows:

As the October 15, 2015 filing deadline was approaching, Mr. Willey had not completed Plaintiffs’ 2014 tax returns. Mr. Willey told Mr. Goei that he was “struggling with” the “presentation” of Mr. Goei’s foreign entities on the tax returns.

On October 9, 2015, Mr. Goei emailed Mr. Willey information that allowed him to figure out Plaintiffs’ 2014 taxable income and gross U.S. tax. Mr. Willey still did not complete Plaintiffs’ 2014 tax returns.

Plaintiffs’ Swiss tax returns were not complete as of the U.S. deadline of October 15, 2015, and Mr. Willey informed Mr. Goei that as of late October Plaintiffs would owe six or seven hundred thousand dollars in penalties. The Swiss returns were not completed until mid-December and not provided to Mr. Willey until after December 15. At that point, because more than two months had passed since Plaintiffs’ U.S. filing deadline, Plaintiffs had incurred three months’ worth of penalties.

Plaintiffs were entirely unaware that the IRS would assess them millions of dollars in penalties and interest as the October 15th deadline passed without a filing. Mr. Willey did not tell Plaintiffs that the IRS would assess them Failure to File Penalties in addition to penalties for failure to make timely tax payments. He also failed to advise them of their right to seek a further filing extension until December 15, 2015, of the ability to file a tax return using estimates of data, or other actions that could have avoided or reduced penalties and interest. Having failed to file a return by October 15th, or to request a further extension to December 15th,[2] Plaintiffs’ fate was sealed; the IRS would assess them a monthly Failure to File Penalty that would continue to run until the return was filed.[3]

When the taxpayers received the Deficiency Notice asserting the now rather significant amount of failure to file penalties, the taxpayers engaged the law firm of Mayer Brown to represent them in an appeal before the IRS Office of Appeals.

The opinion describes the actions the law firm took in representing the taxpayer in working to get the penalties abated in full or in part:

Mayer Brown initially submitted a letter to the IRS arguing that Plaintiffs were entitled to a full abatement of penalties because Plaintiffs’ complicated international tax situation meant that there were “unique, unforeseen complexities in determining [Plaintiffs’] 2014 tax year U.S. tax liabilities” and that as a result, “to avoid filing an inaccurate return, filing was unavoidably delayed.” Mayer Brown then argued that Plaintiffs were entitled to a full abatement of penalties because they had relied on incorrect advice from Mr. Willey and CBIZ. Mayer Brown alternatively argued that Plaintiffs were entitled to an abatement of all but one month’s worth of penalties because they had paid their tax liability in full on November 2, 2015. ECF No. 63 at ¶137. IRS Publication 54 allows taxpayers abroad to request an additional two-month extension of their filing date. If Plaintiffs had requested this extension, they would not have begun to incur penalties until December 15, 2015, instead of October 15, 2015. During the IRS appeal, the IRS asked whether Mayer Brown intended to seek this extension retroactively. Mayer Brown, however, conceded to the IRS that the extension had not been sought in a timely manner, and chose not to make a written request for what would effectively be a retroactive extension.

After the presentation, the IRS agreed to reduce the penalty.[4]

While reduced, there was still a penalty the taxpayers had paid and they brought a claim against the CPA firm looking to be reimbursed for that portion of the penalty.

The CPA sought to argue that the law firm had not adequately raised and pursued positions that could have resulted in the full abatement or at least a larger reduction in the penalty. The Court did find that, under Rhode Island law, it is possible for negligence of the client’s attorney in a legal proceeding to be used by the firm to reduce or eliminate the firm’s liability for any negligence. But, the Court noted, the firm’s client has a low burden to meet to eliminate any such reduction—and, in this case, the client met that burden.

The opinion notes:

“With respect to mitigation, the plaintiff need only make reasonable efforts to mitigate damages; the burden is not ‘onerous and does not require him to be successful in mitigation.”’ Shoucair v. Brown University, No. Civ.A.·PC·96·2896, 2004 WL 2075159 at *12 (RI. Super. Sept. 9, 2004); see also Tomaino v. Concord Oil of Newport, 709 A.2cl 1016, 1026 (RI. 1998).

Defendants contend that Mayer Brown’s decision to not pursue a retroactive extension for the late filing of Mr. Goei’s tax returns constitutes a “failure to mitigate” any damages incurred because of Mr. Willey’s conduct. However, the fact that a plaintiff does not need to be successful in mitigating damages suggests that we need not parse the strategy or decision making of Mayer Brown in its failure to ask the IRS for a retroactive extension for Plaintiffs and its subsequent decision to not pursue this argument after being appraised of its availability to them. Mayer Brown did enough during the appeal to obtain a reduction in the penalty for Plaintiffs. ECF No. 48 at ¶ 54. This is sufficient on its own to meet the low bar set for overcoming a “failure to mitigate” defense in Rhode Island.[5]

In this case it’s not clear why the firm did not pursue the request for the additional two month extension to December 15. The most reasonable explanation would appear to be that the CPA was not aware of this option. The alternative would seem to be a case of this “slipping through the cracks” which seems unlikely since the firm was aware this return was at great risk of not being completed by October 15.

We also do not know the CPA’s decision making process in not advising the client to prepare and file a timely return based on the currently available, even if somewhat imperfect, information on hand. Note that the Form 1040 jurat only provides that the taxpayer indicates that, to the best of the taxpayer’s knowledge and belief, the returns are true, correct and complete and the preparer’s declaration is based on all information the preparer has knowledge of. Certainly preparing a return with full disclosure of how reasonable estimates were made regarding unavailable information would seem to allow signing and filing the return.

We aren’t told if the taxpayer offered to let the firm pursue relief first, but it is not unreasonable for the taxpayer who feels he/she has not received proper guidance to engage a different professional to attempt to resolve the matter. In this case the law firm had been involved with the taxpayer prior to this incident by giving tax advice.

The court ultimately decided that the law firm had improved the situation (reduced the penalty) and was not going to second guess their decision not to pursue a late grant of an extension. The extension would not have eliminated the penalty, since the return wasn’t prepared until well after December 15, and there was no assurance the IRS would grant such relief. Thus, it seems reasonable to conclude that pursuing that avenue had a significant risk of incurring additional representation costs without achieving any additional reduction in penalty beyond what the law firm was able to achieve for the client.

Note that the court did not yet rule on whether, in fact, the CPA or the firm had actually been negligent in providing services to the client. The ruling here was merely on the issue of whether any such potential liability, if found, could be reduced due to the actions of the other adviser not pursuing every possible defense.

[1] Goei, et al v. CBIZ, Inc. et al, USDC RI, C.A. No. 18-263-JJM-PAS, September 29, 2020, https://law.justia.com/cases/federal/district-courts/rhode-island/ridce/1:2018cv00263/44384/70/ (retrieved October 19, 2020)

[2] The IRS will consider providing an additional two months extension for taxpayers out of the country following the expiration of the automatic extension. See IRS Publication 54 (2019), p. 4, https://www.irs.gov/pub/irs-pdf/p54.pdf (retrieved October 19, 2020)

[3] Goei, et al v. CBIZ, Inc. et al, USDC RI, pp. 3-4

[4] Goei, et al v. CBIZ, Inc. et al, USDC RI, pp. 4-5

[5] Goei, et al v. CBIZ, Inc. et al, USDC RI, pp. 15-16