By Keith Lee

Recently, Camico incurred claims involving unclaimed or improperly calculated business tax credits. During the investigation of these claims, Camico learned that most of the largest firms (“promoting firms”) now offer the following services to clients:

The promoting firm will review the client’s prior income tax returns for income tax credits that were not claimed or improperly calculated on the returns. If the promoting firm locates any unclaimed/improperly calculated credits, it will prepare an amended return claiming the unclaimed/improperly calculated credits. The promoting firm typically charges a fee contingent upon the refund amount claimed.

The promoting firms frequently offer and provide these services to clients that are currently engaging other CPAs to prepare their income tax returns. Because of the contingent fee arrangement, there is a strong incentive for the promoting firms to find and aggressively report unclaimed/improperly calculated credits. If the promoting firm does locate any unclaimed/improperly calculated credits, the client can initiate a claim against the CPA who prepared the original return. Damages depend on whether the refund statute of limitations with respect to the tax year(s) involved is still open.

If the refund statute of limitations is open, the amount of damages equals the promoting firm’s amended return preparation fee. These fees often are excessive for the services rendered. If the statute of limitations is closed, the damages will include the amount of the unclaimed credits and can become quite large.

To prevent a client from targeting your firm with this type of claim, Camico recommends:

1) That your firm’s members familiarize themselves with (i) the various federal and state credits available and (ii) how to properly calculate each available credit;
2) That as part of its return preparation process (using an “organizer” or other written communications), your firm obtain client representations regarding the client’s eligibility for the various available federal and state income tax credits; and
3) That your firm consider identifying and carefully reviewing prior returns it prepared that have a strong probability of containing unclaimed/improperly calculated credits, and informing the client if the review uncovers any such unclaimed/improperly calculated credits.

While this type of claim can involve any type of income tax credit, the following credits appear to have a greater likelihood of being unclaimed or improperly calculated:

• Credit for increasing research activities (IRC §41);
• Federal empowerment zone credits (IRC §38(b)(9)/§1396);
• State “enterprise zone” or other credits similar to the federal empowerment zone credits;
• Foreign tax credit (usually improperly calculated) (IRC §901);
• The disabled access credit (IRC §44); and
• The “new markets” tax credit (IRC §45D).