A tax preparation firm discovered that its preparation of a tax return ended up being treated as part of a promotion of an illegal tax shelter by its liability insurance carrier, which meant the carrier refused coverage when clients sued the firm when the IRS came after the programs.  The Sixth Circuit’s decision in the case of Financial Strategy Group, PLC v. Continental Casualty Company, CA6, Docket No. 14-6296, 2015 TNT 152-16 may prove surprising to some since it turns out the firm did not have the protective net it thought it did against these claims.

The firm in this case prepared LLC returns for two clients who had been convinced by financial advisers with a national accounting firm (which is not the firm in this suit) to enter into a program to buy and sell distressed debt that the national firm advised them would reduce their tax bills.  For the year they entered into the program the national firm prepared the LLC tax return for the partnerships through which these investments were held.