If You Missed the Federal Tax Filing Deadline, IRS Assistance is Available
The recent case of Gagliardi v. Prager Metis CPAs LLC (No. 1:23-cv-07454, S.D.N.Y. 2024) has sent ripples through the tax preparation community, serving as a stark reminder of the potential consequences for practitioners who fail to file timely returns on behalf of their clients.
The case centers around Robert and Rosita Gagliardi, who hired Prager Metis, an international accounting firm, to prepare and file their tax returns for 2015 through 2017. What should have been a routine engagement turned into a legal nightmare when the firm failed to file the returns on time. The 2017 return wasn't filed until October 2018, while the 2015 and 2016 returns weren't submitted until 2020. This egregious delay resulted in over $430,000 in IRS delinquency penalties for the Gagliardis. Adding insult to injury, Prager Metis only informed the clients of the 2015 and 2016 filing failures in November 2018, after the IRS had already contacted the taxpayers.
Faced with substantial penalties, the Gagliardis filed a malpractice claim and a claim for unjust enrichment against Prager Metis. The firm attempted to have the case dismissed, citing the landmark United States v. Boyle (1985) decision. In Boyle, the Supreme Court held that taxpayers have a non-delegable duty to file timely returns and cannot rely on an agent's failure as "reasonable cause" for late filing. However, the court in Gagliardi rejected this argument, drawing a crucial distinction between a taxpayer's duty to the government and an accountant's professional duty to their client.
This ruling emphasizes that while Boyle prevents taxpayers from avoiding IRS penalties due to their preparer's failures, it does not shield accountants from malpractice claims by their clients. The court's decision affirms that timely filing is not just a courtesy but a fundamental expectation of professional conduct for tax practitioners.
For tax professionals, the implications of this case are significant. It underscores that they can be held liable for malpractice when they fail to file timely returns, even if the client doesn't actively inquire about the filing status. This liability extends beyond mere penalties to potentially significant damages.
The case also sheds light on the statute of limitations for such claims. In New York, the three-year statute of limitations for malpractice claims begins when the returns become delinquent. However, the "continuous representation" doctrine can extend this period if the professional continues to provide related services, as was the case with Prager Metis and the Gagliardis.
While not explicitly stated in the court's ruling, the case underscores the critical importance of clear, proactive communication with clients about filing deadlines and the status of their returns. The court's stance aims to maintain accountability in the tax preparation profession and protect public confidence in its integrity.
For tax practitioners, this case serves as a wake-up call to implement robust systems for tracking and meeting filing deadlines, maintain clear communication with clients about the status of their returns, and understand that their professional responsibilities extend beyond the mere avoidance of penalties.
It's worth noting that while the case is still in its early stages, with factual determinations yet to be made, it sends a clear message about the courts' view on professional responsibility in tax practice. The ruling suggests that the non-delegable duty of taxpayers to file returns does not absolve preparers of their professional responsibilities.
In light of this case, tax preparers would be wise to view it as an opportunity to review and strengthen their internal processes and client communication strategies. By doing so, they can mitigate the risk of finding themselves in a similar situation to Prager Metis, facing not only reputational damage but also potentially costly legal battles.
Cases like Gagliardi v. Prager Metis serve as important guideposts, shaping the decisions of our practices and the profession as a whole. Every practitioner has faced circumstances of delayed, or even no communication from clients. It is clear from this case, to this point, that it will not absolve practitioners of our responsibility to continuously provide documented communication to our clients.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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