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Tax services claims asserted in 2021 by cause of loss

 Filing error, 50%
36%  Failure to advise/improper advice, 36%
 Failure to detect theft or fraud, 7%
 Mathematical error, 4%
7%  Other, 2%
50%  Fee dispute, 1%
4%

2%

1%

Source: CNA Accountants Professional Liability Claim Database, underwritten by Continental Casualty Company.
Copyright © 2022. All rights reserved.

failed to timely file the individual exten- prior years’ claim data is which party asserted these
sion. The client was assessed a failure-to-pay claims. In 2021, over half of the audit and attest
penalty of $20,000, the IRS denied the penalty services claims were instituted by third parties,
abatement request, and the client demanded primarily lenders or sureties.
payment of the penalty and interest. Consider this claim asserted in 2021:

Future considerations A CPA firm had a long-term financial
The timing of claims related to tax services may lag institution audit client. The client discov-
longer than what is customarily anticipated. Why? The ered that one of its employees embezzled
IRS continues to work through its massive corre- funds by misusing the company credit card
spondence backlog, including requests for penalty and and manipulating bank records. The client
interest abatement. Moreover, the flurry of changes to performed an investigation, determined that
filing dates, legislation enacted immediately preceding $2 million was stolen, and submitted a claim
and during tax season, and new services requested of to its fidelity insurer. The fidelity insurer
tax advisers have increased the potential for error and, brought a claim against the CPA firm, assert-
consequently, claims against CPA firms. ing that the firm’s audit failures allowed the
Additionally, the IRS has been aggressively fraud to perpetuate.
pursuing abusive tax-avoidance schemes. IRS
settlements related to these schemes have been Future considerations
significant and have led to expensive claims The volume of 2021 audit and attest services
against CPA firms. claims decreased by nearly 50% compared with
2020. While this may seem like a cause for
AUDIT AND ATTEST SERVICES celebration, such may not be representative of
Current claim trends future loss experience. Courts were closed or
Similar to prior years, the primary causes of loss only partially open in 2020 and 2021. Stimulus
related to audit and attest services claims include a funds kept many businesses afloat during
failure to detect a misstatement or disclosure error tenuous economic times. Therefore, we may
and a failure to detect a theft or fraud (see the see an uptick in claims once courts are operat-
chart “Audit and Attest Services Claims Asserted ing at full capacity and when the economic
in 2021 by Cause of Loss”). What is different from dust settles.

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