Advisers Help Decide When to Fire an Accountant

Arden Dale for the Wall St. Journal writes:   When trouble crops up on a tax return, a taxpayer faces a dilemma: Is it better to fire the accountant or salvage the business relationship?   Plenty of accountants make errors on tax returns from time to time but most manage to remain on good terms with their affected clients. Make a big mistake or too many, however, and the tax pro can be out of a job.   Financial advisers often help to draw the line between an acceptable mistake and a firing offense. They may spot errors on a tax return or note that an accountant isn't up to preparing a more complicated return. Sometimes, they troubleshoot if the tax pro clearly has a conflict of interest or charges too much. 

"When we start seeing repetitive mistakes, or a misunderstanding of the tax strategy, that's the line where we would go to a client and bring up this conversation," said James Ciprich, a wealth adviser at RegentAtlantic, a fee-only advisory firm in Morristown, N.J., with $2.4 billion under management. 

Next week when he meets with a prospective client, Mr. Ciprich plans to bring up a concern about the man's accountant--raised by variable annuities in his IRA. While the investments offer a tax deduction, they carry large premiums and other expenses, and don't belong in the tax-deferred account. At first, Mr. Ciprich thought an insurance salesperson might be responsible. Then he learned the man's accountant is licensed to sell insurance, and draws a commission from the annuities. 

This tax season, the Internal Revenue Service has a letter-writing campaign to target tax preparers the agency says need to improve. In January, the agency sent letters to some 3,000 accountants and other tax advisers. It said 2011 returns they prepared had a lot of traits that typically indicate errors on Form 1040, Schedule C, used by businesses.

Texas adviser David Diesslin said the letters have created a stir among financial advisers whose clients are affected. Taxpayers either learned of the letters from the targeted accountants themselves, or received letters from the IRS, according to Mr. Diesslin, whose firm in Fort Worth manages $450 million. 

"It's something to watch and evaluate, but the jury is still out depending on the clients' particular situation," said Mr. Diesslin, citing the IRS letter campaign.  He applies what he calls his "three C's of a solid business relationship" when deciding whether a tax pro ought to be fired. If the person isn't creating value, communicating, or the relationship is not comfortable for the client, it's time to part ways. 

Clients of accountants who got the letters are at risk for penalties for inaccurate returns, the IRS said. The agency told recipients it will be "looking for improvements in future returns you prepare," and recommended that some of the accountants brush up on the tax rules through study with IRS-certified instruction.  Advisers have a vested interest in helping clients spot a problem accountant. A whole group of financial professionals can be threatened when one member isn't up to the job. For example, an accountant who can't accurately complete Form 706 to report an estate over $5 million is most likely not the right person to work with the estate attorney and other advisers who serve a client. 

"Financial advisers who see an accountant is screwing up should tell their client exactly what is wrong and get a second opinion from another accountant to confirm," said Bari Z. Weinberger, a divorce lawyer in New Jersey who sees a lot of tax errors in her line of business.

One woman fired her accountant after Ms. Weinberger pointed out that he had cost her $20,000 in taxes that she didn't owe. Though a divorce agreement said alimony would be nontaxable, the accountant had included it as part of the woman's taxable income.

"She fired her accountant and found someone to help her file an amended return--thereby recouping quite a refund," Ms. Weinberger said. 

Because taxes are complicated--and only get more so the more money a client has--financial advisers are quick to note that honest mistakes are inevitable. Nonetheless, there are plenty of unscrupulous tax preparers, along with the merely incompetent. Each year, the U.S. Justice Department brings to light an array of criminal behavior by tax professionals who prey on clients. 

Camico, a company in San Mateo, Calif., that insures accounting firms, see hundreds of complaints against accountants. Each year, some 8,000 CPA firms contact Camico about problem clients and engagements. About 400 of those cases result in claims, some of which end in settlements for millions of dollars.  Wealthy business owners are among those most likely to sue over tax advice, according to Ronald Parisi, executive vice president of risk management at Camico.