Myth

The adviser is responsible if it goes wrong

If a claim is reduced, the tax authority looks to the business that filed it, not to the adviser who prepared it. What the adviser owes you depends on the engagement letter, and it may be less than you expect.

The myth

The adviser prepared the claim and signed off on it, so if the tax authority rejects any of it, the adviser is responsible. The business can recover whatever it has to repay.

What actually happens

The tax authority's relationship is with you. The claim was filed in your name, and if it is reduced you repay the benefit, usually with interest and sometimes a penalty.1 Some countries also have rules for the people who prepare claims, and a preparer can face consequences of their own, but that does not move your liability.2 The detail for your country is on the country pages.

What the adviser owes you is a matter of contract. Look for the liability clause in the engagement letter. A clause like this can do three things. It limits the adviser's liability to a multiple of the fee, or to the fee itself. It excludes the tax, interest and penalties that you repay, on the ground that those were never the adviser's money. And it excludes loss caused by information you provided. The liability and indemnity clause page explains the wording.

Audit support, where it is offered, describes help with the review: preparing documents, answering questions, attending meetings. Unless the letter says so in plain words, it does not mean the adviser pays the tax, interest or penalties. Engagement terms vary, so check your own letter. Whether any part of the fee comes back if the claim is reduced is a separate term, and it may not be there at all.

Where the belief comes from

Advisers are professionals, and when you deal with a professional you expect the person who does the work to answer for it. That is true here too, as far as it goes: an adviser who is negligent can be pursued under the contract, and in some countries under rules for preparers. The gap is between what you can pursue and what you have to pay first. The tax authority does not wait for your claim against the adviser. It collects from you.

A worked example

On the shared example, a $250,000 claim on a $35,000 fixed fee is reduced by $50,000 on review. The business repays $50,000 with interest where it applies. It reads the engagement letter and finds that the adviser's liability is limited to the fee paid, $35,000, and excludes tax, interest and penalties. Even if the business could show the adviser was at fault, which takes time and evidence, the most it could recover is $35,000, and the clause says the repaid tax is not covered at all. The business carried $50,000 of risk it thought the adviser carried. Illustrative figures.

What to do instead

Read the liability clause before you sign, and ask the adviser to explain it in plain words. Ask three questions. If the claim is reduced, does the fee come down? Is help with the review included, and what does it cover? What, if anything, does the adviser pay if the claim fails because of their work?

Then protect yourself in the way that does not depend on the clause: see the whole claim before it is filed, and have the people who did the work read it. A claim you have checked is one you can defend.

What a fair clause looks like

A liability clause is not a red flag in itself. Limiting liability is ordinary professional practice. A limit set at a multiple of the fee is not a red flag in itself. What is worth asking about is a clause that excludes everything, or that excludes the adviser's own errors in the technical case. A fair letter says what the adviser stands behind, in plain words, and pairs it with review support so that you are not alone if questions come.

Sources

The business repays a reduced claim, with interest and penalties where they apply: IRS, "Interest" and "Accuracy-related penalty" (United States); HMRC, "Tell HMRC if you've claimed too much R&D tax relief" (United Kingdom); Revenue, Tax and Duty Manual Part 29-02-06, "R&D tax credit: clawback of relief" (Ireland); Income Tax Act section 161(1) and CRA, "Avoiding penalties" (Canada); Department of Industry, Science and Resources, "Decisions we make about R&D Tax Incentive applications" (Australia); Inland Revenue, "Interest on overpayments and underpayments" and "Shortfall penalties" (New Zealand); IRAS, "Penalties for errors in tax returns" (Singapore). Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page. Back
Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page. Back

Rules and common practice differ between countries. See the page for your country.

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