Tax Lawyer's Blog

Martha Stewart’s daughter is suing her CPA for $334,000 for incorrectly preparing her 2002 income tax return.

In 2006 she was audited and the IRS determined that there was a deficiency of $737,000 in the tax she paid on her capital gains.

Ms. Stewart was assessed interest on the underpayment of $143,000 and underpayment penalties of $295,000.

This is from the New York Post by way of Paul Caron:

Alexis Stewart’s lawsuit says she sought Mirras’s help in 2002, when she redeemed her interest in the “Martha Stewart Family Limited Partnership” in exchange for shares in her mom’s company, Martha Stewart Omnimedia.

She sold the shares that same year, while her mom was under investigation in the insider trading case.

The suit says Mirras was supposed to determine Stewart’s tax liability for the capital gains she realized from the stock sale, and he improperly computed the figure, resulting in Stewart paying much less to the taxman than she should have.

Here is my quick take on the issues:

Recovery of the Tax Portion of the IRS Audit Assessment

Ms. Stewart can’t recover the amount of the tax because she would have had to pay that had Mirras done the return correctly in the first place.

It would seem she understands this because her complaint seeks damages of less than the tax amount.

Recovery of Penalties

If the CPA really did screw up, she should be able to get out of the penalties based on her reasonable reliance on a qualified tax advisor.

Now I assume Ms. Stewart hired another CPA or a tax attorney to represent her in the audit of the 2002 tax return. 

This new representative should have made a formal request for the abatement of the penalties.

If he or she did request penalty abatement and the request was denied, was the denial appealed?

If so, what was the result of the appeal and did the case make it to Tax Court?

On the other hand, if the request for penalty abatement was not made, perhaps Ms. Stewart is suing the wrong person.

Observation: It’s probably still not too late to file a Request for Penalty Abatement. This could even be done through an Offer in Compromise based on Doubt as to Liability. But even if it is too late, assuming Ms. Stewart has actually paid the penalty to the IRS, she could file a Form 843 (PDF) – Claim for Refund and Request for Abatement – wait six months or until the IRS rejects the claim, then file a lawsuit against the U.S. government in U.S. District Court for recovery of the penalties plus interest on the penalty amount (i.e accrued at the IRS rate from the date she paid the penalty amount to the date the IRS pays her back).

Recovery of Interest

This leaves the interest portion of the IRS assessment.

Remember, Ms. Stewart had the use of the $737k of back taxes for 4 years.

What did she do with the money and how much did she earn on it?.

Ms. Stewart can only recover as damages the difference between the amount of the IRS interest assessment and the amount she earned on the tax underpayment.

Recovery of Attorneys’ Fees

I can’t be sure whether or not Ms. Stewart will be able to recover her attorneys fees.

The answer to this depends on the terms of Mr. Mirras’s malpractice policy and the existence of a New York state statute that allows the recovery of attorneys’ fees.

Bookmark & Share: