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Insurance Claim Chronicles: Preparing Out-of-State Returns

February 02, 2026

The below claim is drawn from CAMICO files to illustrate some of the risks and pitfalls in the accounting profession. All names were changed.

Scenario:

In 2012, Jones & Anderson, CPAs, based in Montana, began working for a high-value client preparing their annual tax returns. Firm partner James Anderson managed this service until his retirement in 2020, after which partner Tom Jones took over work for the client. The client did business in a few different states, including Ohio, where a rule resides that if the tax is less than $1,000, no return needs to be filed. When Anderson took over the account, he noticed that for 2020, the client met the requirement to file in Ohio, and so he filed a return. However, he did not verify whether the client’s returns in prior years were required in Ohio, assuming the previous partner had performed that analysis and concluded that no filings were necessary. As a result, the client was audited by the state of Ohio for the 2017–2019 tax years because, according to the client, returns should have been filed in Ohio for those years but were not. The audit is ongoing, but damages and a claim could arise from the firm’s oversight.

Select the answer that is the correct response:

A. After the audit is completed, how could this situation turn into a claim?

  1. The IRS or state auditor assumes liability, negligence and fraud on the CPA and possibly revokes their license.
  2. Penalties could be imposed by Ohio for failure to file state returns if the client was required to file them.
  3. The audit will most likely be dismissed since it was firm partner James Anderson (now retired) who prepared the client’s tax returns during those years.

B. How should CPAs protect themselves when filing out-of-state tax returns for clients?

  1. CPAs need to be careful when preparing out-of-state tax returns because each state has its own unique tax laws, rules, filing requirements, and professional regulations. Mistakes can expose both the CPA and the client to financial and legal risk.
  2. Some states have reciprocity agreements, meaning residents working across state lines may not need to file in both. A CPA must know which income is taxable in each state (especially for clients who live in one state but work or own property in another). Misapplying a state’s laws can lead to underpayment or overpayment of tax.
  3. CPAs should properly research the laws in each state and verify compliance for every tax return each year.
  4. All of the above.

 Correct Answers:

A: 2. If a claim arises and there is liability, then CAMICO will handle the matter and attempt to settle it under the policy with the firm (insured) being billed for the deductible. Although the IRS can penalize a CPA or tax preparer for their role in misfiling a tax return, the client (taxpayer) is the party responsible for paying any additional taxes owed, as well as any other IRS penalties and interest.

B. 4. Filing dates, electronic filing rules, extensions, and forms differ by state. Missing a filing or using the wrong form can lead to penalties or audit exposure. Clients rely on CPAs for accurate multi-state compliance. Errors in state returns can trigger notices, audits, or penalties, hurting client trust and the CPA’s reputation.

CAMICO is the VSCPA's preferred partner for professional liability insurance. Learn more here, visit camico.com, or contact Rachel Painter, CAMICO senior account executive.