Can I Sue a Tax Preparation Company?
You may be able to sue a tax preparation company for negligence, negligent hiring, breach of contract, and fraud. Your lawsuit may be directly against:
- an individual tax professional;
- a firm that employs accountants and/or tax attorneys;
- a company that develops tax software.
If you're thinking about suing individual tax preparers, such as certified public accountants (CPAs), check out our blog article, “When Can I Sue a Tax Accountant?" That article may also be helpful if you're thinking about suing an individual tax lawyer who may have committed malpractice or breached their fiduciary duties.
This article specifically focuses on suing tax preparation companies and firms, not people or individual practitioners. You can consult with a tax lawyer or separately, with a business and commercial law attorney, to determine whether a tax prep company or firm has:
- Improperly prepared your taxes (negligence claims)
- Carelessly hired someone who improperly prepared your taxes (negligent hiring claim)
- Failed to provide you with the tax prep service you purchased from them (breach of contract claim)
- Intentionally and maliciously provided you with faulty tax prep services (fraud claim)
Can I Pass the Buck?
Taxes are filed with the federal government through the Internal Revenue Service (IRS). On the state level, the agency with whom your taxes are filed will be called a Department or Division of Revenue/Taxation, a Tax Commission or Comptroller, or a Franchise Tax Board.
When you're suing your preparer, it'll be because of a problem that has arisen out of either or both of your:
- Federal tax return
- State tax return
Those problems typically involve an internal revenue code violation and can result in having to pay:
- additional taxes owed (or a smaller tax refund)
- a monetary penalty (tax penalty)
- tax credit or tax liability assessment
When any of these things happen to you, your first urge will be to pass on the blame. Sadly, no matter how strongly you point the finger at your tax prep company, the IRS or your state tax agency will be happy to tell you just how much they don't care that the problem wasn't directly your fault.
So no, you can't pass the buck. You are on the hook. It might help to provide the IRS with supporting documentation to show, for example, that your small business was the victim of a prep company that made careless mistakes during a busy tax season. You can even try to file an amended return to correct the problem. But that's usually not going to be enough for the IRS to fully forgive any penalties that you might have to pay.
Ultimately, you'll have to cough up to the government coffers first and sue your tax prep company afterward to repair the damage to your bank account.
In this article, when we only mention the IRS, you should still assume the same rationale applies if your tax issues concern your state government's tax collection agency. We also use the terms “company" and “firm" interchangeably to refer to tax preparation service providers.
Suing for Negligence
Oh no—it turns out you owe the IRS a thousand bucks more than your tax prep software calculated for you. Apparently, it was because the company that programmed the software for you jumbled numbers due to a careless coding error. You can sue for negligence by showing:
- The tax prep company owed you a duty of care to properly calculate your taxes because you hired them for that particular service;
- The tax prep company breached that duty because they acted carelessly and unreasonably in the way they calculated your taxes using improper program code;
- Your taxes were improperly calculated because of the tax prep company's carelessness (and not your own oversight);
- You suffered resulting financial harm or damage (e.g. IRS penalty).
Suing for Negligent Hiring
Oh no—it turns out you owe the IRS a thousand bucks more than your tax prep company calculated for you. Apparently, the accountant they hired to process your documents was obviously a habitual drunk and the company was too careless to ever notice it. You can sue for negligent hiring by showing:
- As an employer, the tax prep company did not exercise reasonable care in hiring the drunken accountant as their employee;
- The accountant, a clear habitual drunk, was incompetent to handle your taxes;
- If the tax prep company had exercised reasonable care, the accountant's incompetence would have been apparent to them;
- As of result of the tax prep company's failure to exercise due care in hiring the right person for the accounting position, you as their customer suffered harm (IRS penalties).
Suing for Breach of Contract
Oh no—it turns out you owe the IRS a thousand bucks in late filing penalties because your tax prep company delayed in processing your return despite your timely submission of documents to them. Your breach of contract lawsuit would allege:
- A valid contract for timely tax preparation existed between you and the company;
- You held up your side of the deal by paying for the tax prep services and timely providing your documents to the company;
- The tax prep company failed to honor their part of the deal by delaying the processing of your return;
- You suffered damages (e.g. IRS fines) because of the tax processing delay.
Suing for Tax Return Preparer Fraud
Tax fraud doesn't just have to mean that a taxpayer purposefully lied to the IRS. What if you were owed a larger refund and a tax prep company committed tax fraud to lower your refund payment so they could take more of your money? What if they deliberately ripped you off by misrepresenting the amount of their preparation fees?
Scams like this are all too common. According to the IRS, you can file a complaint against tax preparers for:
- Filing or changing your tax return documents without you knowing or giving permission
- Misreporting your filing status, exemptions, dependents, income, or expenses, so that you (or someone in your place) can wrongfully get a larger refund.
- Failing to enter a correct Preparer Tax Identification Number (PTIN) that identifies the preparer to the IRS
- Refusing to give you a copy of your return or using the wrong software to prepare the return in the first place
- Falsely pretending to be a lawyer, CPA, enrolled agent, or actuary.
In these kinds of cases, the elements of a fraud lawsuit are that:
- The tax prep company made a statement or promise to you, e.g., to file your taxes right;
- When in fact the promise was false, the company knew it was false, and they lied to you with the intent to deceive you; and
- You reasonably relied on their promise in letting them file your taxes for you, and you suffered damages (e.g. IRS penalties) as a result of that reliance.
If you win your lawsuit against a tax preparation company, you may be able to recover:
- Contribution and Indemnity — They pay you or help toward paying the amount the IRS charged you. This is usually available if you had a contract with the tax prep company where they promised to make you whole for their mistakes.
- Compensatory Damages — All the money you lost. Medical bills are less common here, though a court might find it reasonable that someone suffered stress, depression, or a heart attack from all their IRS troubles.
- Punitive Damages —Extra money on top of your other damages just to punish the tax prep company for their fraud. This is to make an example out of them if they acted maliciously and intentionally in causing your problems with the IRS.
Contact An Attorney
Depending on the facts of your case, either a tax lawyer or separately, a business and commercial law attorney, may be able to help you sue a tax preparation company. Depending on whether you're suing for negligence, breach of contract, or fraud, the applicable statute of limitations (time limit) to file your case might be different. So don't delay.
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