Are you personally liable to the ATO for your accountant’s mistakes?
Generally, you will be personally liable to the Australian Taxation Office (ATO) for your accountant’s mistakes in managing your tax affairs. However, in some limited circumstances, taxpayers may be able to avoid personal liability and penalties by the ATO for their accountant’s mistakes.
In Australia, you can engage an accountant to give you advice and help you manage your personal or business tax affairs. For example, you may engage an accountant to prepare and lodge your income tax return or business activity statement with the ATO. If you engage an accountant to prepare your tax documents or give you accounting advice, you should confirm that the accountant is a registered tax agent with the Tax Practitioners Board.
Once your accountant has lodged your tax documents with the ATO (e.g. income tax returns or business activity statements), the ATO may audit those documents to check and confirm that the information submitted by your accountant to the ATO on your behalf is true and correct. During the audit process, the ATO may identify some errors made by your accountant. For example, the ATO my identify some income that was not correctly reported in your tax return by your accountant or some deductions which were overclaimed by your accountant or cannot be substantiated with supporting evidence. The mistakes identified during the ATO audit may have been caused by your accountant’s carelessness, recklessness or deliberate actions.
General rule for a taxpayer’s liability to the ATO for accountant’s mistakes
If you engage an accountant in Australia, the accountant acts as your agent in your dealings with the ATO. Therefore, under the law of agency, the general rule is that you are legally responsible to the ATO for any mistakes that your accountant makes in relation to your tax affairs in Australia.
Before your accountant lodges your tax documents with the ATO, you need to sign a declaration that states that the information you have provided to the ATO in the document is true and correct. If your accountant has put the wrong information or figures in the tax document and you sign the document without fully understanding the figures, you are accepting full legal responsibility for any mistakes that may have been made by your accountant.
Whether you make a mistake in your tax document, or your accountant makes a mistake in preparing your tax document, the result is the same. Ultimately, you will be penalised by the ATO for the mistake.
If the ATO audits you, changes your income tax return and increases your tax liability, the ATO will usually add penalties and interest on top of the additional tax that you have to pay. When that happens, taxpayers who had engaged an accountant to prepare their tax returns commonly say that:
- “I relied on my accountant to do the right thing as a tax professional and prepare my tax return correctly”
- “My accountant did not tell me that I had to report this amount as income in my tax return”
- “My accountant told me I could claim this deduction in my tax return”
- “My accountant never explained this to me or gave me advice on this issue”
- “My accountant did not check my invoices and receipts properly before my tax return was lodged with the ATO”
- “My accountant calculated all the figures in my tax return and I do not know how he did the calculations”
- “My accountant made me do it and it is all his fault”
Unfortunately, none of those arguments are going to work as a valid defence under the tax law in Australia and you will be personally penalised by the ATO for any mistakes made by your accountant in your tax return.
If your accountant fails to take reasonable care in relation to your tax affairs, the ATO is likely to impose an administrative penalty of 25% of the tax shortfall on you personally.
If your accountant is grossly careless or reckless in relation to your tax affairs, the ATO is likely to impose an administrative penalty of 50% of the tax shortfall on you personally.
If your accountant mismanages your tax affairs deliberately or intentionally, the ATO is likely to impose an administrative penalty of 75% of the tax shortfall on you personally.
Therefore, choosing a good and competent accountant is very important as you will ultimately be liable to the ATO for any mistakes or errors that your accountant makes in preparing your tax documents.
Exception to the general rule and safe harbour provisions for accountant’s mistakes
In 2010, the “safe harbour” provisions were introduced in Australia to ensure that services provided by accountants and registered tax agents to the public were of an appropriate professional and ethical standard. The safe harbour provisions basically provide an exception to the general rule and a taxpayer will not be liable to certain administrative penalties if they provide all the relevant tax information to their accountant and registered tax agent, but the agent:
- does not take reasonable care and makes a false or misleading statement to the ATO that results in a tax shortfall amount; or
- does not take reasonable care and fails to lodge a tax document with the ATO by the due date.
The safe harbour provisions can only apply to:
- a false or misleading statement penalty, when the statement is made on or after 1 March 2010; or
- a failure to lodge on time penalty, when the document has a due date for lodgment of 1 March 2010 or later.
However, it is important to note that the safe harbour provisions do not apply in circumstances where the penalty arises from recklessness or intentional disregard of the tax law by your accountant and registered tax agent. The safe harbour provisions also do not apply to other administrative penalties, including when tax avoidance schemes are involved.
Minimise your personal liability and risk for your accountant’s mistakes by getting a second opinion from a tax lawyer
Tax lawyers are expert solicitors who specialise in dealing with tax audits, tax objections, tax appeals, tax debts and tax disputes with the ATO.
To minimise your personal risk and exposure to ATO penalties for your accountant’s mistakes, it is recommended that you get a second opinion from an experienced tax lawyer on your tax affairs before your tax documents are lodged with the ATO by your accountant.
An independent legal advice from an experienced tax lawyer in Australia will give you further assurance and peace of mind that your accountant and registered tax agent has prepared your tax documents correctly in accordance with the tax laws and regulations.
Legal advice on your tax affairs from experienced tax lawyers in Australia
This content of this article is offered as general information only and should not be relied on as specific legal advice.
To get legal advice from King Lawyers on your specific circumstances, please contact us to arrange an initial consultation with our expert tax lawyers.