Statute of Limitations for Accountant Negligence Based upon Discovery Rule

In Coulter vs. Thornton which was decided by the Arizona Court of Appeals on January 3, 2017, the Defendant, an accountant, urged that the malpractice claim brought against him for a defective tax shelter device his firm created on behalf of the Plaintiffs for the tax year 2002 should have been summarily thrown out of court as a stale claim under the applicable Arizona Statute of Limitations.  As indicated, the accountant created the purported shelter in 2000, and Plaintiffs paid into for the year 2002.  In 2006 and 2007, the I.R.S. disallowed the shelter and sent notices of deficiency, which the accountant assured Plaintiffs they would have set aside if they litigated the disallowance.  After years of litigation, Plaintiffs settled with the IRS by agreeing to pay $254,938.20 as an additional excise tax.

In superior court, based on the accountant’s motion, the judge dismissed the Plaintiffs’ claims because they were brought well in excess of two years following the I.R.S.’ notices of disallowance.  The court of appeals disagreed noting that the application of the statute of limitations is governed by the discovery rule which provides that a claim does not “accrue” until a plaintiff “discovers or by the exercise of reasonable diligence would have discovered that he or she has been injured…” by the negligence of the accountant. Here, the court observed, if Plaintiffs were required to file a claim against the accountant before a final resolution of the purported deficiency, it would place Plaintiffs in a position of having to pursue to legally inconsistent theories at the same time:  one against the IRS purporting the deficiency was inappropriate, and the other against the accountant which would, of necessity, acknowledge the propriety of the claim of deficiency.  The court also pointed out that the accountant in this case continued to advise Plaintiff s they would prevail by litigating the notices of disallowance.  According to the court, the application of the statute of limitations in favor of the accountant merely gave rise to a question of fact to be determined by a jury as to whether or not Plaintiffs’ continued reliance of the accountant’s advice was reasonable under the circumstance.

Therefore, the court of appeals reversed the holding of the superior court judge and remanded the case for further proceedings.


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