Editor’s Pick: Tax Planner Faces Malpractice Claims Over Decades-Old Tax Advice—What Went Wrong?

In a case that every tax professional should take note of, the prominent law firm Sidley Austin LLP finds itself defending against claims that it provided faulty tax advice over two decades ago, leading to massive IRS liabilities for a family. The plaintiffs, the Cáceres family, are seeking to recover $7 million after settling with the IRS, claiming Sidley’s advice on a complex asset liquidation set them up for disaster. The kicker? The lawsuit was filed over 25 years after the advice was given. So, how are the plaintiffs still able to pursue the case? It all boils down to a claim of fraud—and how that could toll the statute of limitations.

Timeline of Events

• 1997: Sidley Austin advises the Cáceres family on a tax strategy related to an asset liquidation. Sidley issues an opinion letter that reassures the family the transaction is legal and won’t trigger tax liabilities.
• 1997-2018: For over 20 years, the Cáceres family faces no IRS action based on this advice, giving them no reason to doubt Sidley’s expertise.
• 2018: The IRS sues the Cáceres family for $56 million in taxes related to that 1997 transaction, claiming it was a tax shelter. The family eventually settles with the IRS for $7 million in 2023.
• 2023: The Cáceres family sues Sidley Austin LLP, claiming the firm is responsible for the tax fallout and should pay the $7 million settlement.

The Plaintiffs’ Claims

The Cáceres family is bringing forward claims for negligent misrepresentation, professional negligence (legal malpractice), and breach of contract. They argue that Sidley failed them in several key ways:

1. Bad Advice: Sidley assured the family that the tax strategy was sound, but decades later, the IRS disagreed, labeling it as an illegal tax shelter.
2. Failure to Disclose: The family claims Sidley never warned them about the risks associated with the tax strategy, even after IRS investigations into similar tax schemes came to light.

But here’s the legal twist: ordinarily, a tax professional’s advice would be subject to a 4-year statute of limitations under Georgia law. Since the advice was given in 1997, why are these claims still being heard in 2024?

The Fraud Claim and Tolling of the Statute of Limitations

The Cáceres family is arguing that the statute of limitations should be tolled (paused) due to Sidley’s “actual fraud.” In other words, they claim Sidley concealed critical information about the legality of the tax strategy, preventing them from realizing the bad advice until it was too late. Specifically, the family claims that Sidley knew the tax strategy had legal flaws but withheld that information, leading the family to believe everything was fine until the IRS came knocking 20 years later.

Under Georgia law, if a party can prove “actual fraud,” the statute of limitations doesn’t begin to run until the fraud is discovered—or should have been discovered through reasonable diligence. The Cáceres family says they had no reason to question Sidley’s advice until the IRS lawsuit hit in 2018, and only then did they realize they had been misled.

Key Takeaway for Tax Pros: Disclose, Disclose, Disclose!

For tax professionals, this case highlights a critical lesson: always make proper and timely disclosures to clients about potential risks and legal uncertainties. Sidley Austin is facing serious claims not just because the advice might have been flawed, but because the plaintiffs are alleging Sidley didn’t provide full transparency. When clients rely on your expertise, keeping them fully informed can be the difference between a satisfied customer and a costly lawsuit decades down the road.

As this case moves forward, all eyes will be on the final outcome to see whether Sidley Austin can successfully defend its decades-old advice or if the Cáceres family will prevail in their bid for compensation. Stay tuned—this could set an important precedent for tax professionals everywhere!