Accountant Who Bungled Couple's Tax Return Couldn't Shift Blame to Their Attorney

(Parker Tax Publishing October 2020)

A district court held that an accountant could not, as a matter of law, raise an affirmative defense of imputed negligence on the part of his client's attorneys in their representation of the client in an appeal before the IRS in order to reduce the amount of damages for which the accountant was liable for malpractice in preparing the client's tax return. The court found that (1) Rhode Island law does not provide for an affirmative defense of imputed negligence for acts or omissions by an attorney acting in an advisory role, and (2) the law firm's decision not to request a retroactive extension for the late filing of the client's return was not a failure to mitigate damages because Rhode Island law sets a low bar for overcoming a failure to mitigate defense and the law firm did enough during the appeal to obtain a reduction in the client's penalty. Goei v. CBIZ, Inc., 2020 PTC 316 (D. R.I. 2020).

Background

In 2007, Dexter Goei and Veronica de Piante Vicin hired CBIZ, Inc., CBIZ MHM, LLC, and Grafton Willey to prepare their U.S. tax returns. Goei is the CEO of Altice USA (Altice), a multinational telecommunication company. While living in Switzerland in 2010, Goei formed an entity in Luxembourg to hold his various partnership, equity, and investment interests. In 2014, Altice tendered an initial public offering and, as a result, Goei had substantial income for that year.

Willey provided guidance and services to Goei in connection with the preparation and filing of Goei's and de Piante Vicin's U.S. tax returns. Willey would, among other things, prepare the couple's tax returns, arrange for extensions of filing deadlines, prepare foreign income reports, and provide strategies for amounts and timing of estimated payments and for avoiding penalties. Because Goei was a U.S. citizen living abroad, the couple had an automatic extension from April 15, 2015, to June 15, 2015, to file their 2014 return. Willey arranged for an additional six-month extension to file the couple's returns by October 15, 2015. However, Willey did not file their return by the deadline because he was struggling with the "presentation" of Goei's foreign entities on the return. On October 9, 2015, Goei emailed Willey the information that allowed him to calculate the couple's 2014 taxable income and U.S. income tax. Willey still did not timely complete the 2014 return.

Goei and de Piante Vicin were unaware, and Willey did not inform them, that the IRS would assess them millions of dollars in penalties and interest for failing to file their return by the October 15th deadline. Willey also failed to advise the couple of their right to seek a further filing extension until December 15, 2015. Nor did he suggest filing a return using estimates of data, or suggest other actions that could have avoided or reduced penalties and interest. The couple received their finalized Swiss tax return and sent it to Willey on December 17, 2015. Willey did not begin working on the couple's U.S. tax return until the end of January 2016, and did not provide it to the couple until February 9, 2016, nearly two months after receiving the Swiss tax return.

On April 25, 2016, the IRS issued a notice of deficiency for the couple's 2014 tax year which applied penalties and interest. Goei engaged a law firm, Mayer Brown, to pursue an appeal before the IRS Office of Appeals. In the appeal, Mayer Brown argued that Goei and de Piante Vicin were entitled to a full abatement of the penalties due to their reliance on CBIZ and Willey. Alternatively, it argued for an abatement of all but one month's worth of penalties because the couple had paid their tax liability in full on November 2, 2015. Taxpayers living abroad may request an additional two-month extension of their filing date, and if the couple had requested this extension, they would not have begun to incur penalties until December 15, 2015, instead of October 15, 2015. During the IRS appeal, Mayer Brown intended to seek this extension retroactively. However, Mayer Brown did not seek this extension in a timely manner and chose not to make a written request for a retroactive extension. At the conclusion of Mayer Brown's appeal, the IRS agreed to reduce the penalty.

Goei and de Piante Vicin sued CBIZ and Willey for negligence and malpractice based on Willey's failure to advise them of their filing options and the consequences of failing to timely file and pay their 2014 taxes. CBIZ and Willey asserted affirmative defenses alleging comparative negligence by Mayer Brown, arguing that Mayer Brown's decision not to pursue a retroactive extension for the late filing of Goei's tax returns constituted a failure to mitigate any damages incurred due to Willey's conduct. Goei and de Piante Vicin filed for summary judgment concerning Willey's affirmative defenses.

Analysis

The district court granted summary judgment for Goei and de Piante Vicin after holding that the affirmative defenses related to imputed negligence failed as a matter of law. First, the court found that, under Rhode Island law, the negligence of an attorney for acts or admissions related to an advisory role may not be imputed to their client. CBIZ and Willey contended that Mayer Brown, as an agent of Goei and de Piante Vicin, was negligent in failing to advise or supervise the couple and Willey during the IRS appeal. But the court found that in Rhode Island, an agency relationship exists between and attorney and client only for work related to legal proceedings and does not apply for acts or omissions related to an advisory role. Thus, the court concluded that any failure on Mayer Brown's part to advise or supervise Willey was not imputable to Goei and de Piante Vicin.

However, the court clarified that the alleged negligence of Mayer Brown during its representation of Goei and de Piante Vicin in the IRS appeal would be imputable, given that it happened during a legal proceeding. On this issue, the court found that Rhode Island law sets a relatively low bar for defeating a failure to mitigate defense; Goei and de Piante Vicin only had to make reasonable efforts to mitigate damages, and were not required to be successful in mitigation. While Willey contended that Mayer Brown's decision not to pursue a retroactive extension for the late filing of Goei's returns constituted a failure to mitigate any damages incurred due to Willey's conduct, the court found that it did not have to parse the strategy or decision making of Mayer Brown. In the court's view, Mayer Brown did enough during the appeal to obtain a reduction in the penalty for Goei and de Piante Vicin. The court found that this was sufficient on its own to meet the low bar set for overcoming a failure to mitigate defense. As a result, the court held that there was no genuine issue of material fact regarding this portion of CBIZ and Willey's affirmative defense.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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