Legal Liabilities, Privileged Communications, and Workpapers

Vocabulary flashcards covering legal liabilities, torts, standards of care, levels of fault, privileged communications, IRC Section 7525, and workpaper confidentiality rules for CPAs.

Contract Principles in Tax Malpractice

Legal principles that impose an obligation on a professional to prepare tax returns diligently and competently.

Tort Principles in Tax Malpractice

Legal principles establishing that a professional has a duty to exercise the level of skill, care, and diligence commonly exercised by other members of the profession under similar circumstances.

Elements of Tax Malpractice

The four conditions a plaintiff must prove to demonstrate tax preparer malpractice: 1) tax preparer owed a duty to taxpayer, 2) breach of duty, 3) plaintiff suffered injuries, and 4) breach caused the injury.

Breach of Contract

A claim resulting when a CPA fails to fulfill the explicit terms of an engagement letter, requiring privity of contract to bring suit.

Privity of Contract

A legal relationship requiring that only a direct party to the contract or a named third-party beneficiary has standing to sue under a contract theory.

Ordinary Negligence

An unintentional tort characterized by a breach of the duty to exercise reasonable care (due care), failing to act with the skill expected of ordinarily prudent CPAs.

Elements of Ordinary Negligence

The four requirements a plaintiff in a civil action must prove: 1) defendant owed a duty of care, 2) breach of duty by failing to act with due care, 3) causation of injury, and 4) damages.

Due Diligence

The best defense available to a CPA against a charge of ordinary negligence, accomplished by thoroughly documenting all work in workpapers.

Ultramares Decision

A rule followed in a minority of states that limits CPA liability for ordinary negligence narrowly to persons in privity of contract and intended third-party beneficiaries.

Actual Fraud

An intentional tort involving actual intent to deceive, making the CPA subject to both compensatory and punitive damages.

MAIDS Acronym

The five required elements of actual fraud: Misrepresentation of material fact, Actual and justifiable reliance, Intent to Induce reliance, Damages, and Scienter.

Scienter

The legal element of fraud defined as an intent to deceive, knowing a statement was false, or acting in bad faith.

Constructive Fraud

Also called gross negligence; an act committed with reckless disregard or lack of even slight care, satisfying the elements of fraud (MAIDS) without explicit intent to deceive.

Best Defense to Constructive Fraud

Demonstrating a lack of scienter by proving that the CPA acted in good faith.

Levels of Fault

The legal spectrum of liability: 1) Reasonable care (not liable), 2) Lack of reasonable care (ordinary negligence), 3) Lack of even slight care (gross negligence/constructive fraud), 4) Actual fraud (civil), and 5) Criminal fraud (criminal prosecution).

Compensatory Damages

Reasonably foreseeable monetary awards for ordinary negligence or breach of contract, covering tax overpayments, penalties, interest, tax correction costs, and consequential damages.

Punitive Damages

Monetary damages awarded in excess of compensatory damages to punish bad behavior, available in civil malpractice actions involving fraud.

Privileged Communications

Evidentiary protection granted to specific confidential relationships preventing exchanges from being disclosed in court without the privilege holder's consent.

Tax Practitioner-Taxpayer Privilege

A privilege under IRC Section 7525 extending attorney-client confidentiality protections to tax advice exchanged between taxpayers and federally authorized tax practitioners in noncriminal tax matters.

Federally Authorized Tax Practitioner

An individual recognized under federal law to practice before the IRS, specifically including certified public accountants, enrolled agents, and enrolled actuaries.

Tax Shelter Exception to IRC Section 7525

A statutory exclusion stating that tax practitioner privilege does not apply to written communications connected with promoting participation in any tax shelter.

Workpapers Ownership

The legal standard stating that engagement documentation and workpapers belong to the preparing accountant or firm, not the client.

Exceptions to Workpaper Confidentiality

Permissible instances to disclose workpapers without client consent: subpoena, prospective practice buyer (review only), state CPA quality-control panel, client lawsuit defense, AICPA/state trial board defense, or required GAAP disclosure.