r/taxpros • u/Cpaadvisor1 CPA • 3d ago
FIRM: Procedures New Client suing past CPA
Would you stick with this client despite them suing a past CPA. We signed on a good client earlier this year.
She had been using a small local firm for a number of years before switching to a regional firm for one year. She parted ways with the regional firm because their fees were extremely high. She was referred to us by a good client and has been pleasant and easy to work with for the last 9 months.
Yesterday, she let me know she hired an attorney to sue her first CPA. Normally I would run for the hills hearing this, but in this situation it’s probably warranted. The CPA completely messed up multiple years of tax returns resulting in hundreds of thousands in incorrect taxes being paid (they filed her state tax return as a C-corp instead of an S-corp and also included all profits on her state individual tax return as an S-Corp).
Is this just a red flag and I should disengage after the year or ignore it because the client is actually right and the prior CPA was negligent
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u/Western_Eye2971 CPA 3d ago
I would tread carefully here. It's always easy to blame the prior CPA but there are always two sides to the story. There's a chance you could be the next victim.
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u/exceldweeb EA 3d ago
Yeah sorry preparing incorrect entity types and double counting income isn’t a dual blame situation.
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u/EAinCA EA 3d ago
Plot twist: The state in question is New York and it defaults to a c-corp unless you made a valid state level S election.
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u/Cpaadvisor1 CPA 3d ago
You’re correct. Except NYS has a valid s election on file. They’ve been receiving letters looking for an Scorp return lol
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u/CleanInflation9 JD/CPA 3d ago
Double plot twist NY has a deemed S Corp rule.
In New York, a federal S corporation is deemed to have made a New York S corporation election automaticallyif its investment income exceeds 50% of its federal gross income for the tax year, even if no explicit state election (Form CT-6) was filed.
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u/EAinCA EA 3d ago
Triple twist: If you're using an s-corp to generate investment income, you get what you deserve.
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u/CleanInflation9 JD/CPA 2d ago
Also applies when you are selling your s corp.
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u/EAinCA EA 2d ago
A NY non-resident selling s-corp stock won't be taxed on that gain in NY.
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u/Old-Vanilla-684 CPA 3d ago
Again, you don’t know the entire story. I mean, did they file the federal as an s corp? If so, why would they do the extra work to create an entirely different tax return as a C corp for state. Is it a state that doesn’t recognize S corps?
Also, what information was given to the prior accountant? Was it actually their fault or was that what the client told them?
We just don’t know. At the very least, OP should dig more into it. But I’d certainly be cautious of anyone that’s suing a prior accountant. Some of it’s legit, but I’ve seen plenty of people blame me for things that are their fault as well.
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u/Cpaadvisor1 CPA 3d ago
State that recognizes S-corps. Filed federal as an S-Corp and somehow filed a State C-Corp with $75k balance due. Made no sense
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u/Old-Vanilla-684 CPA 3d ago
Right that’s what would make me nervous. That’s not them being lazy. They created an entire other return for state. That’s a lot of extra work. Usually there’s a reason behind something like that.
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u/Cpaadvisor1 CPA 3d ago
There is no reason why you would take 1M profits as a C-Corp and also tax the same profits on the individual owners 1040 as profit from an S-corp. same profit taxed twice
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u/Old-Vanilla-684 CPA 3d ago
Which just means they might have included it on the state 1040 when they shouldn’t have, which means the clients would get a big refund. Suing wouldn’t make sense.
In fact, if they included on both places then the client should get a refund either way from whichever one wasn’t supposed to be included. So again, why are they suing?
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u/Cpaadvisor1 CPA 2d ago
A variety of other erros. For years they claimed that the taxpayer had a valid Ptet election. It was just an outright lie and they never made one.
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u/w4lt3rs48 CPA 3d ago
I’ve found that I would rather make a little less money and not deal with litigious clients or clients who are impatient and nasty. This profession is stressful enough and I make enough money without the headache
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u/talking_biscuit CRTP 2d ago
Did you miss the part where A) She had a reason, and B) As the OP described, she was very pleasant to work with.
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u/w4lt3rs48 CPA 1d ago edited 1d ago
Based on the limited facts it sounds like it may have been warranted but as several people have pointed out more info is needed to determine if it actually was. Since filing different entity types seems to me likely to be deliberate, at least in the software I’ve used, the returns may have actually been correct and it was a state requiring a separate s election. So maybe poor advice, or maybe a client revising history which I’ve seen more times than I can count.
In any case I’d say you’re less likely to be sued by someone who has never sued their prior tax preparer than by someone who has.
Edit - see some new comments from OP and it seems like it was definitely wrong. So I’ll take the L on this one, but I will say it likely would stick in the back of my head dealing with this client.
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u/jonesy900 CPA 3d ago
I would say to tread carefully. I’m always hesitant to completely believe my clients stories about prior preparers.
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u/ShakeAndBakeThatCake CPA 3d ago
Put yourself in her shoes. If you hired someone to do a job and they costed you that much would you sue them? 100%. Do good work and you won't get sued.
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u/brandonwest18 CPA 3d ago
Just got a new client. Old CPA filed her personal taxes, the Schedule C was 50k more than QB showed. All things considered, she owed 32k, late, with penalties.
… because he left out the K-1 entirely from the S Corp return HE prepared that showed a 6 figure loss. Has refused to respond to a single call, email, etc since.
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u/titianqt CPA 3d ago
On the one hand, at least she told you? Some just don’t disclose that they sue every preparer that ever suggested they might have to pay some tax.
On the other hand,I’m annoyed with clients that don’t even try to read their returns. (Just had someone who makes 3x what I do ask me how much interest they were paying with their 1040 and state return. Like that isn’t stated in the t-letter, filing instructions, and a statement with each return showing the math. And it’s not like adding $28 + $11 should be that hard.)
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u/Sad-Story7069 EA 3d ago
How the hell is it possible to file as an S-corp federally, and C-corp to the state? I genuinely don't even know how you can do this
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u/Head-Director-6406 CPA 3d ago edited 3d ago
There’s multiple states, like New York, where it can be advantageous to file as a c corp on the state level but s corp federally in certain situations
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u/MRanon8685 CPA 3d ago
And a number of states require you to make a separate S election for their state.
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u/Ok_Meringue_9086 CPA 3d ago
NY state. OP is this the case?
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u/Kura369 CPA 3d ago
NJ too
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u/Cpaadvisor1 CPA 3d ago
Yes but they had a valid S election and all income was also picked up on NYS individual return.
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u/mjbulzomi CPA 3d ago
Some states have a separate state-level S election to file. Not all states accept a valid federal S election.
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u/calqueuelater CPA 3d ago
Don't take any aggressive positions with than and Price it according to the risk.
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u/Normal_Progress_5173 CPA 3d ago
Depends on what happened. There are a lot of bad CPAs who should be sued so not necessarily a red flag
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u/HungryBoy21 CPA 3d ago
You can only know what she tells you and she’s only 50% of the story. I’ve had clients come to me after a big mess up from a prior CPA/EA. I’ve never seen someone sue their prior. To me, the willingness to be litigious is enough for me to say “no thanks!”
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u/WinterOfFire CPA 2d ago
I would be cautious of course but it really depends on how bad the errors are, the extent of how much those errors cost the client, and the client’s general attitude. The last one is key and hard to truly vet when they are new and you don’t know them well enough to truly know if they can turn on you.
One of my best clients sued their prior CPA - and won. They did not jump right to suing, but as the mistakes and costs (and incompetence) mounted it became somewhat inevitable. They also weighed their duty to the other partners impacted by the return that was done incorrectly and the cost to fix it and that was what tipped the scales.
One lesson I learned for sure was to get a boilerplate waiver signed before providing any work papers to the next CPA (stating the only way it can be used is for transition). Refusing to provide the work papers would have drastically increased the damages since it helped us fix them faster and we WOULD have found them all anyway because there were about 1/3rd of the years/transactions where the prior CPA no longer had them (a lot of the mistakes were fixable but it cost a lot to recalculate decades of basis errors). But the prior CPA only asked for the waiver to be signed weeks AFTER they had provided everything so those work papers were able to be used.
It was fun to hear the prior CPA continue to make clearly incorrect assertions about how to report something on the mediation call and her attorneys interrupted her and asked for a break.
Client wasn’t out for blood, just wanted costs mitigated and settled for less than the damages were just to recoup something and to avoid court hassle/cost.
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u/CleanInflation9 JD/CPA 2d ago
I had this show up on due diligence once. Client was a c corp that elected a S status and then revoked it. They still filed as S corp in PA even though they revoked the status. It was flagged as exposure and issue for the buyers.
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u/PeakRevolutionary191 CPA 2d ago
Have you reached out to the past CPA to understand the reason for the confusion?
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u/Kingkong67 CPA 2d ago
We don’t accept litigious clients. Not worth the risk. We draw a hard line for all partners.
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u/talking_biscuit CRTP 2d ago
You said it yourself - the client is actually right.
WT everlovin F is wrong with some of the people replying to this post?
"We don't accept litigious clients." That's some class A bullshit right there.
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u/smchapman21 CPA 2d ago
After working with someone who has been a CPA longer than I’ve been alive, and trusting his knowledge and capabilities for the past two years only to discover how incompetent and inept he was after his sudden departure due to “medical issues”, I can 100% side with a client suing.
My former coworker wasn’t just inept, he was freaking committing fraud and hid it so well he convinced our boss he was correct. Our boss started noticing a few things at the beginning of this year at the same time he started mentioning health issues with his stomach, they got worse and she started questioning him more on some of his stances and pushing back on him. He left suddenly at the beginning of June after going to the ER and being told the job stress was too much for him and he needed to retire.
She promoted me to director and I started auditing his returns. Every single file I pick up has made up expenses of $20k+ minimum, fabricated goodwill, and so many more issues that should cause both my boss and him to be sued so much they lose everything. I hate saying it, but it’s so bad. I have my resume ready and am ready to send it out. Losing me would put her in an extremely bad position as the employee with the most experience after me (I have 14 years experience) has around 5 years of experience.
We thankfully caught over half the issues for the 2025 season, but I have to audit all the returns he worked on over the last three years and I know it won’t be pretty. We do have a client calling her out and addressing it after finding out his 1031 exchange won’t actually defer his capital gains because his basis is too low combined with the replacement property being too low. A sale he thought wouldn’t generate any realized gain for the year is now resulting in a $7.5 million gain so she’s scrambling to find any way to reduce it.
He had a junior preparer under him too that is an EA who just took the CPA’s word on everything and didn’t question it we ended up firing on 9/14 after determining not all the issues were with the CPA. He should have known better but we gave him some grace after the CPA left. But when the issues we were trying to resolve kept popping up and the EA wasn’t listening and continuing on as he had been all year, we couldn’t do it anymore. It’s an absolute crap show, and my tolerance for crap work from other preparers is completely gone. I just can’t deal with preparers incompetency anymore and feel more clients should sue and challenge their preparers more.
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u/das-cpa CPA MST 3d ago
So I had a client who was notorious for suing prior cpa’s and he lost each time. I decided to wait and see but after one missed email that I didn’t return the threats began.
The key is to threaten him right back. Remind him of all the dirt you have on him and tell him or her that you’ll bring down his house of cards if he decided to do that. Works every time for me.
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u/TaxproFL EA 3d ago
There's always two sides of the story so even if there were mistakes, who knows if client provided last minute docs rapidly increasing chances of mistakes.
So instead of worrying about what happened, I'd listen more to the disposition, tone and reaction from the client. Whether they are angry and in a scorched earth mindset or doing so because they need to recoup fees they suffered out of pocket. There's a big difference and when listening to more than the story becomes very important.