⚖️ CPA Legal Liability: Breach of Contract and Negligence — CPA Exam (REG) | Taxation Course

Why It Matters

Recognizing the difference between contract breaches and negligence helps CPAs avoid costly lawsuits and ensures they meet exam requirements, protecting both their practice and client interests.

Key Takeaways

• CPA breach of contract triggers liability for missed filing deadlines.
• Negligence claims arise when CPA fails to exercise reasonable care.
• Only parties in contractual privity can sue for breach, with exceptions.
• Foreseeable third parties may pursue tort claims if reliance is known.
• Distinguish ordinary negligence from gross negligence and fraud for penalties.

Summary

The video explains the legal exposure CPAs face when acting as tax preparers, focusing on two primary avenues of liability: breach of contract and negligence‑based tort claims. It contrasts these with audit‑related liabilities, emphasizing that a CPA’s promise to file a return by the April 15 deadline creates a enforceable contract, and failure to meet that deadline can trigger a breach claim. Key insights include the elements of each cause of action. A breach requires proof that the CPA promised a service, failed to deliver, and caused measurable loss. Tort liability hinges on duty of care, breach of that duty, causation, and damages, with ordinary negligence defined as a lack of reasonable care, while gross negligence and fraud involve higher degrees of recklessness or intent. The speaker also clarifies privity rules—only parties to the contract may sue for breach, though foreseeable third parties, such as lenders relying on a tax return, may pursue negligence claims if they are identified in the engagement. Illustrative examples feature Mr. Johnson, whose CPA missed the filing deadline and incurred IRS penalties, and a hypothetical audit scenario where a CPA fails to confirm accounts receivable, illustrating the breach‑of‑duty element. The instructor highlights that intent matters: negligence is unintentional carelessness, whereas fraud requires deliberate deception. The session also includes a practice multiple‑choice question to reinforce the distinction between duty, breach, causation, and damages. For CPA candidates and practicing professionals, understanding these distinctions is critical for exam preparation and risk management. Proper engagement letters, clear timelines, and diligent review processes can mitigate exposure, while awareness of who may sue—clients and foreseeable third parties—guides contract drafting and professional liability insurance considerations.

Original Description

This video lecture explores the primary causes of professional legal action against CPAs, specifically focusing on breach of contract and ordinary negligence. It defines the specific duties owed to clients under a contract and the "reasonable person" standard applied to professional care, while detailing the elements a plaintiff must prove to win a case. Understanding these liability thresholds and common defenses is vital for the CPA REG exam and for protecting your professional practice in the tax and accounting field.

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