Potential Liability exposures from 2010 ROTH conversion rules
While CPA’s have historically advised clients on the differences between ROTH and traditional retirement plans, the year 2010 offers additional retirement planning considerations.
The year 2010 rules will allow for the conversion of traditional retirement plans into ROTH plans regardless of the clients AGI. The rules are detailed and the potential benefits will vary with each client. CPA’s should become familiar with the rules prior to meeting with clients this tax season as undoubtedly the clients will ask the CPA for their input in this daunting decision.
This income tax and retirement planning alert will not focus on the technical rules that need to be followed to facilitate a ROTH conversion in 2010, but will identify the potential professional liability exposures if the CPA fails to advise the client of the potential benefits available in 2010.
The Merriam-Webster dictionary defines negligence as follows:
"The failure to exercise the care that a reasonably prudent person would exercise in like circumstances."
In the author’s opinion, there is a strong likelihood that if a CPA fails to advise a client on the ramifications involving a 2010 ROTH conversion there may be an increase in professional liability claims which will assert negligence on part of the CPA. Clients consider the CPA the trusted advisor and expect tax advice on issues that will impact them. This is not to imply that CPA’s have a duty to inform a client on all issues that develop in a given period. However, some issues have such an importance and apply to so many, that the failure to advise may be considered to be negligence. Unlike many tax strategies, the 2010 ROTH conversion strategy will expire at 12/31/2010.This limited window of opportunity augments the likelihood of a malpractice claim.
Once the CPA advices the client on the 2010 ROTH conversion ramifications , this advice should be documented in writing and maintained for a period consistent with the CPA’s record retention policy. The tax organizer and marketing material can supplement the necessary documentation requirement. Historically, defense attorneys have struggled defending CPA’s where the documentation of advice provided to a client is not in writing and or not maintained for an adequate period of time.
In a society as litigious as ours, coupled with successor CPA’s who may point the finger at their predecessors and client children and grandchildren who may owe more taxes than expected, the author feels strongly on the need to alert your clients in regarding the ROTH conversion rules available in 2010.
The following language may be helpful:
< Date >
<Client Name>
<Client Address>
Dear <Client Name>:
We have reviewed our files and it has become apparent to us that you and/or your family could benefit from the conversion of various retirement plan assets you own to a ROTH IRA. The federal government has provided taxpayers with an opportunity to make such a conversion in the year 2010. We want to make you aware of the potential benefits that may apply. The rules are complex and can vary with each individual. In our opinion these potential benefits should be explored with our firm before the year expires.
Please note: this is a very basic discussion of the available benefits. Should you wish to discuss these potential benefits in greater detail, please contact our office as soon as possible to set an appointment to discuss these plans further.
Very truly yours,
_______________________________
<Accountant Name>
<Firm Name>
The information in this alert is general and nature and you should carefully apply the 2010 ROTH conversion rules to each individual client based on the facts and circumstances of each client. The author assumes no responsibility for updating any information subsequent to the date published herein
Circular 230- To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this article is not intended to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.
John F. Raspante, CPA, MST, CDFA
John F. Raspante holds the dual roles of Director of Compliance and Risk Management as well as the Director of Education for Graf Repetti & Co. LLP, Certified Public Accountants & Business Advisors. Prior to joining Graf Repetti, Raspante worked nine years for CAMICO Mutual Insurance Company, one of the nation’s largest provider of accountants’ professional liability insurance. Raspante’s primary responsibility at CAMICO was providing loss prevention services to the organization’s largest insured’s.
