Million-dollar view from one of my favorite rocks in Farmington, Utah
Did you engage your accountant to work for your company (LLC or S Corp) or did you engage him or her to work for you personally? The reason that I ask this has to do with whether you can personally rely on your accountant’s advice or only your company can. This becomes important when holding your accountant responsible for his or her advice, including when filing taxes and making important business decisions. Let me explain:
Utah’s Accountant-Friendly Statute
Apparently Utah accountants have good lobbyists because they have a pretty sweet statute protecting them from lawsuits. See Utah Code section 58-26a-602. The statute provides that in order to hold your accountant liable, you must be “in privity of contract” with the accountant. This means that the written agreement with your accountant has to have your name on it– not your company, not your spouse, not your father-in-law. The two exceptions to the privity rule are very limited: 1) cases of fraud or intentional misrepresentation; or 2) cases where the accountant (a) knew the client (meaning, the one in privity) intended the third party (you) to rely on the accountant’s advice and (b) the accountant “identified in writing to the client” an intent that the other party rely on the accountant’s advice.
The first exception is straight-forward and protects the public from bad actors. Easy. The second, however, is a slippery fish. It means that only the entity or person named on the engagement agreement with the accountant can hold the accountant liable for his advice. I have successfully used this statute to get a case against my accountant client dismissed. It’s very powerful and is applied this broadly by Utah courts.
Let’s take a look at how this might play out in real life: Let’s assume your LLC or S Corp is the named entity that retained the services of your accountant. You might think that because these are known ‘pass-through’ entities that all of your accountant’s work for you or the company would automatically put you (the individual) in privity of contract with the accountant. Not so– or at least, not without an expensive legal fight. A case example is helpful here:
Reynolds v. Bickel, 2013 UT 32: In this case, a company owner, Reynolds, hired Bickel to provide accounting services for his three S Corps we’ll refer to as “Altaview.” The engagement agreement with Bickel and his accounting office identified Altaview as the client and was signed by Reynolds on behalf of Altaview. Reynolds considered selling Altaview and hired Bickel to advise regarding the tax consequences of the sale. Bickel reviewed the sale and made various recommendations and ultimately the sale was structured in a way to reduce Reynolds’ tax liability to $663,000– down from a potential tax liability of between $1,500,000 to $2,000,000. After the sale closed, Bickel informed Reynolds that he made a mistake and Reynolds’ personal tax liability would be increased by $1,513,614. Reynolds, rightfully, blew a gasket. He had relied on Bickel’s tax advice in pursuing and structuring the sale and then was told he had to pay $1.5 million more in taxes because of Bickel’s bad advice. Cue lawsuit.
Bickel’s first defense in the lawsuit was to assert the above accountant-friendly statute. The trial court bought it and dismissed Reynolds’ lawsuit. Cue appeal. Reynolds appealed and the Utah Supreme Court reversed because it found enough emails to meet the “writing” requirement in a collection of 25 emails between Bickel, Reynolds, and Altaview’s in-house accountant that discussed Reynolds’ personal tax liability. A bit of good news for Reynolds who had probably been in litigation for several years and spent gobs of money on his attorneys.
The reason I tell you Reynolds’ story is because it could easily have gone against him. You may not be so lucky. You need to make sure that you have a written agreement with your accountant (see the first statutory requirement that you be in “privity of contract”) and that you and your company are both the ‘client’ and entitled to rely on the advice being provided. If you are not the ‘client,’ you will not likely succeed in a lawsuit against an accountant. Hopefully you will never be in a position that would put your accountant’s advice to the test. If you are, however, make sure you can at least hold him or her responsible for their professional advice.
Call Me. The above discussion probably raises as many questions as it answers. You likely have more questions than this post or the other information on this website can provide. I regularly represent Utah businesses, accountants, clients of accountants, and business-persons in a variety of contexts. You cannot make a good decision if you do not get competent advice from a qualified, experienced attorney. You need to protect yourself and your interests. You do this by pursuing what you are entitled to and getting competent legal advice. Call me or contact me directly. Using my many years of experience and backed by a firm of legal specialists in many legal fields, I can help you evaluate your case and help you make smart decisions.