photo of Kevin Durant by Keith Allison
When he found out he was being audited by the Internal Revenue Service, NBA star Kevin Durant tried to no-look pass the responsibility to his former accountant. But after realizing that what looked like a layup was probably more like a half-court shot, Durant dropped the case.
Durant’s attorneys filed a federal lawsuit in December against California-based CPA Joel Lynn Elliott, who Durant said made major mistakes on his tax returns. Elliott prepared taxes for Durant and for his company, Kevin Durant Enterprises LLC, from 2007 to 2011. Durant’s attorneys alleged that Elliott deducted travel expenses improperly as business expenses when they were, in fact, personal. The suit also took issue with the treatment of Durant’s personal chef’s salary, which Elliott treated as a business deduction as well.
“In preparing a client’s tax returns, a reasonable prudent accountant would have conducted a basic inquiry and sought documentation to confirm that each travel expense for which a deduction was recorded was truly business related,” the lawsuit said, according to The Associated Press.
Durant and his company recently dismissed the lawsuit. But the question remains: Was this a case of a careless accountant failing to do his duty to an athlete-client who relied on him, or was it a misunderstanding regarding a tax preparer’s basic responsibilities?
Without knowing all the details of the case, it is impossible to say. There are too many stories to count of athletes and other celebrities whose financial advisers and accountants left them in financial ruin and on the IRS’ blacklist. Durant is a well-liked athlete who generally stays out of trouble. The biggest controversy he has generated during his professional career has been whether his nickname should be “The Durantula” or “Slim Reaper.”
Tony Nitti, a Forbes contributor, wryly joked that “Durant’s first mistake, of course, was hiring a tax preparer who goes by three names, as people who do so are generally only fit to serve as famous assassins, serial killers, or country music singers.” I think Durant’s real mistake, if he made one, may have been misunderstanding what a responsible accountant’s role should be.
Tax preparers are not auditors. They must take positions that are reasonable and supported by tax law; they also cannot take positions contrary to information they know (or should know) about their clients. But unless Elliot was specifically instructed that the expenses were personal or had other reasons to be suspicious of the kind of deductions he reported on Durant’s tax returns, it is hard to dismiss the positions he took as sloppy or reckless. Professional athletes do a great deal of traveling, and they don’t usually bring their accountants along. If Durant told Elliott the travel was personal and Elliott deducted it anyway, Elliott was certainly in the wrong. If Durant provided his accountant with a report showing total travel expenses paid by his business, and expected him to sort out the business travel from the personal travel without guidance, the blame is less clear-cut.
Similarly, if Durant told Elliott that his chef was a personal expense and Elliott willfully took a deduction anyway, Durant would have had every right to be upset. But if the chef was just lumped into a large collection of expenses Durant’s business paid, it is not so outlandish to think that a professional athlete, whose health and fitness is crucial to his livelihood, might employ a chef for professional purposes. Athletes also have a responsibility to monitor what they ingest, as certain ingredients could lead to failed drug tests. If the financial statements for Durant’s business simply included expenses for a personal chef, Elliot may have made an informed decision to treat it as a business expense.
The responsibilities of a tax preparer are laid out in Treasury Department Circular 230. If the tax preparer knows of any errors or omissions in the client’s tax reporting or other documentation, the preparer must inform the client promptly and explain the likely consequences under the tax code. In other words, tax preparers must tell their clients if they see something missing or unsupported in a return.
Tax preparers must also use “due diligence” in preparing and filing tax returns, as well as in evaluating representations their clients make. Failure in this area was the crux of Durant’s attorneys’ argument against Elliott. However, Circular 230 does not place the burden on the tax preparer to prove all such representations fully before filing. If Elliott had a reasonable suspicion that he was taking an untenable position on Durant’s behalf, that is one thing; if Durant miscommunicated and gave Elliott no reason for suspicion, that is another.
At Palisades Hudson, we tell our clients that we do not audit or verify every piece of data they give us, though we may ask them for clarification if anything is unusual or unclear. This position is not an uncommon one. And even the most responsible tax preparers may take positions with which the IRS will later disagree.
Durant said that Elliott’s mistakes led to back taxes, interest and possibly penalties. It is not clear whether he and his new financial professionals have appealed the IRS assessment, or plan to. If he concedes that the expenses should have been taxable in the first place, and is not charged penalties, then ultimately Durant will only be responsible for tax that he concedes should have been the government’s anyway, plus interest at today’s low rates.
Tax preparers are not guarantors. It is possible that Durant gave Elliot clear directions and Elliot disregarded them. Or Durant may not have understood what an accountant like Elliott could and could not offer. We don’t know for sure. But just like athletes, tax preparers can ultimately only work with the tools they have been given.
Judging from the public’s initial response to Durant’s lawsuit, there are a lot of misconceptions out there about what a tax preparer’s responsibilities are. The reckless opportunist who leads his celebrity client into trouble makes for an exciting story, but in the real world, sometimes simple miscommunications can overwhelm the best efforts of everyone involved.