Couple's Non-delegable Duty to Timely File Returns Does Not Preclude Suit Against CPAs

(Parker Tax Publishing July 2024)

A district court refused to dismiss a couple's accounting malpractice claim against a CPA firm, and an individual CPA in that firm, for their failure to timely file the couple's tax returns and held that the couple's non-delegable duty to timely file their tax returns did not preclude their malpractice claim. Further, the court concluded that the statute of limitations for the filing of the malpractice claim was tolled until the couple terminated their relationship with the CPA firm. Gagliardi v. Prager Metis CPAs LLC and Philip D'Angelo, 2024 PTC 240 (S.D. N.Y. 2024).

Background

Robert Gagliardi and his wife, Rosita, hired a New York CPA firm, Prager Metis CPAs LLC (Prager), to prepare their tax returns. They subsequently brought an action in the Southern District Court of New York (SDNY) against Prager and one of its CPAs, Philip D'Angelo, in which they alleged that Prager and D'Angelo failed to file multiple years of their tax returns with the IRS. This failure resulted in the Gagliardis incurring over half a million dollars in fees and penalties.

Prager and D'Angelo sought to dismiss the Gagliardis' action and asked the district court to reject portions of a Report and Recommendation (R&R) issued by a magistrate judge which had denied Prager's and D'Angelo's dismissal request. Prager and D'Angelo argued that they were insulated from liability for their alleged malpractice and that the Gagliardis should have brought their case within three years of the date that their tax returns were deemed late. The R&R found that the doctrine of continuous representation - which applies when a professional continues to perform services, after alleged malpractice, that are related to the original (allegedly deficient) services - tolled the three-year statute of limitations.

Prager and D'Angelo appealed the findings of the R&R to the SDNY. First, they disputed the conclusion that the non-delegable duty to timely file tax returns did not preclude the Gagliardis' claim for accounting malpractice. They argued instead that, to state a claim for accounting malpractice under New York law, a plaintiff must allege that the accountant's conduct was a proximate cause of the alleged injuries. Prager and D'Angelo contended that the Gagliardis' non-delegable duty to timely file their tax returns severed proximate causation between the Gagliardis' injuries and Prager and D'Angelo's failure to timely file the returns.

Second, Prager and D'Angelo rejected the R&R finding that the Gagliardis' malpractice claim began to accrue on the dates that their tax returns were deemed late because that was when Prager and D'Angelo breached their duty to timely prepare their clients' tax returns. According to Prager and D'Angelo, the statute of limitations did not begin to run until the IRS actually assessed penalties.

Third, with respect to the R&R finding that the doctrine of continuous representation tolled the three-year statute of limitations for their alleged malpractice, Prager and D'Angelo objected, citing the holding in Ackerman v. Price Waterhouse, 644 N.E.2d 1009 (N.Y. 1994) that professional malpractice claims begin to accrue when the malpractice is committed.

Analysis

The district court held that (1) the R&R correctly concluded that a taxpayer's non-delegable duty to timely file tax returns did not preclude the Gagliardis' claim against Prager and D'Angelo for accounting malpractice; (2) accounting malpractice claims governed by New York law are subject to a three-year statute of limitations and the R&R correctly determined the accrual date for the Gagliardis' malpractice claim; and (3) the R&R correctly found that the continuous representation doctrine tolled the three-year statute of limitations relating to the Gagliardis' professional malpractice claim.

According to the district court, the statute of limitations for the Gagliardis' malpractice claim against Prager and D'Angelo was tolled until the Gagliardis terminated Prager as their tax preparers. As a result, the court refused to dismiss the Gagliardis' accounting malpractice claim against Prager and D'Angelo.

With respect to the non-delegable duty of a taxpayer to timely file tax returns, the court observed that this duty is owed to the government and does not preclude a taxpayer's claim for accounting malpractice. The court found that Prager and D'Angelo owed the Gagliardis a duty of professional practice and the Gagliardis had a right to have confidence in Prager and D'Angelo's ability to perform their professional duties. The Gagliardis' accounting malpractice claim, the court said, began to accrue when Prager and D'Angelo failed to timely file the Gagliardis' tax returns, and the three-year statute of limitations on the Gagliardis' malpractice suit was tolled by the doctrine of continuous representation.

With respect to Prager and D'Angelo's reliance on the Ackerman case holding that professional malpractice claims begin to accrue when the malpractice is committed rather than when the IRS assesses penalties, the court said Prager and D'Angelo were confusing accrual with tolling. The Ackerman decision, the court noted, is about when the statute of limitations begins to run, not when it may be tolled, and specifically notes it is not a case about the continuous representation doctrine. Thus, the court stated, the Ackerman decision provides no basis to question the R&R's application of the continuous representation doctrine.

For a discussion of practitioner civil penalties, see Parker Tax ¶262,100.

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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