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If Your Accountant Screws Up, You're on the Hook, Rules 6th Cir.

By Jonathan R. Tung, Esq. | Last updated on

The Court of Appeals for the Sixth Circuit affirmed a lower federal district court's ruling that Maurice Vaughn (former pro baseball "Mo" Vaughn) must be held accountable for fees and penalties arising out of his accountant's breach of fiduciary duties to him.

Does good faith selection of a financial manager shield you from the consequent fees and penalties assessed against you by the IRS? Surprise! No, you're still hosed.

Cheating and Embezzling

Maurice "Mo" Vaughn hired a financial company and its owners to manage his finances sometime in 2004. The company and owner filed Vaughn's returns for 2004 through 2006, but only the '04 and '05 taxes were paid properly. In 2007, neither the company nor its owner filed or paid Vaughn's taxes.

Vaughn took over his own financial affairs in 2008 and discovered that the company's owner had been "cheating him for years" and "embezzling" money behind the scenes. Vaughn successfully sued the company and has judgments against the company and the owner.

The Buck Stops ... Here

But the question remains. What about the IRS penalties assessed against Vaughn? Vaughn sought to recover late penalties assessed against him on account of his 2006 and 2007 taxes.

Vaughn attempted to advance a theory that he was entitled to a reimbursement of the penalty sums because he satisfied the "reasonable cause" exception to I.R.C. sec. 6651(a)(1). The relevant language in that section states that an "addition" (read, "penalty") is proper "unless it is shown that such failure is due to reasonable cause and not due to willful neglect. Our italics.

Vaughn seized on this language and argued that he had used ordinary business prudence and care in selecting the owner and company. Additionally, he argued that the activities of the company left him unable to pay.

The court didn't buy either argument and waved United States v. Boyle in Vaughn's face. Boyle is a case directly on-point in that it dealt with deadlines. SCOTUS, in that case, made it clear that Congress placed the onus of paying one's taxes by a set date on the taxpayer -- not some agent of the taxpayer. "Congress" SCOTUS said in Boyle, "intended to place upon the taxpayer an obligation to ascertain the statutory deadline and then meet that deadline, except in a very narrow range of exceptions."

More importantly, Boyle stood for the rule that an agent's job to "attend to the matter" did not relieve the principal of his duty to comply with the statutory deadline. The buck stops with the taxpayer.

Complex Matters and Deadlines

To refine the point even more, the Sixth Circuit once again called upon SCOTUS. Deadlines, say SCOTUS, "require no special training" and do not excuse principal neglect; and certainly does not qualify as "reasonable cause" for a late filing reimbursement under sec. 6651(a)(1).

Taxpayer Moral of the Story

The decision of the court is rooted firmly in principal-agent law in that principals are generally held accountable for the action and inaction of their agents. It's not as if the principal is left without recourse -- you can always sue the no-good agent who injured you. But the reasonable course of action is to do one's homework and find an advisor who is properly bonded.

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