Professional Liability Case Studies

Case in Point #1

Settlement Amount: Approximately $50,000

An accountant prepared income tax returns and provided consulting services for a contractor for several years. The client also employed an in-house bookkeeper.

The state department of revenue conducted a sales and use tax audit of the client. The audit revealed that the client purchased materials out of state that were used on in-state jobs. These materials were subject to use tax, but the client did not remit the tax. The outstanding taxes plus interest totaled approximately $100,000.

The client sued, alleging that the accountant failed to advise them of the need to remit the tax. The taxes due were on closed jobs that had concluded several years earlier and therefore were not recoverable from the contractor's clients.

In his defense, the accountant claimed that he was engaged only to prepare income tax returns and provide some limited consulting advice, and presumed that the client's bookkeeper was advising and following up with the owner regarding sales and use tax obligations. The owner alleged he relied on the accountant for all tax related advice.

Due to the fact that there was no written agreement between the accountant and the owner defining the scope of services to be performed, the matter was settled for approximately $50,000.

Case in Point #2

Settlement Amount: Portion or the $20,000 in taxes and penalties incurred by the client.

An accountant prepared annual income tax returns for an individual. The client changed jobs, and asked the accountant about the rules for rolling over an existing traditional Individual Retirement Account (IRA) into her 401(k) plan with her new employer. The accountant advised her to seek a direct rollover from the IRA to the new plan.

The client instead closed out the IRA account and had the check made payable to her, intending to deposit it to the 401(k) account. Her 401(k) plan had a thirty day waiting period before she could transfer funds in from existing retirement accounts. She deposited the check ten weeks after it was drawn, which was beyond the sixty day period during which she could have completed an indirect rollover. Had the indirect rollover been properly completed, she would have been able to recoup the 20% in taxes withheld from the IRA when she closed the account.

The following year, when the accountant prepared her income tax return, she learned that the 20% amount withheld would be treated as a taxable distribution, subject to regular income tax and a 10 % premature distribution penalty.

She subsequently made a claim against the accountant, alleging that he failed to advise her of the rules regarding both direct and indirect rollovers of IRA distributions, and that she would not have chosen an indirect rollover had she been advised of these risks.

While the accountant alleged that their discussion revolved around completing a direct rollover and that the client was properly advised of these rules, he had no notes from the conversation and there were no letters or e-mails evidencing the advice provided to the client. The claim was settled for a portion of the $20,000 in taxes and penalties incurred by the client.

Case in Point #3

Settlement - Over $200,000

The investment adviser managed a couple's stock portfolio over a number of years. Against the adviser's advice, the husband liquidated some stock and used the money to engage in day trading, resulting in some significant losses. He passed away shortly thereafter.

At approximately the same time as the husband's death, the stock market experienced a significant downturn. Between the prior losses and the downturn in the market, the portfolio declined in value by more than one third.

The widow sued the investment adviser, alleging he negligently managed the portfolio, leading to the losses.

The investigation indicated that the stocks held in the portfolio which were purchased on the adviser's recommendation outperformed the market during the period in question. Additionally, the fees charged for services rendered were reasonable under the circumstances.

However, the widow was elderly and in declining health, and claimed total reliance on the investment adviser. She alleged that the adviser failed to advise her regarding the risks associated with the portfolio and should have recommended additional diversification. Given these allegations and the fact that the widow would have elicited substantial jury sympathy at trial, this case was settled for an amount in excess of $200,000.

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