Accounting Negligence, Penalties, and How to Avoid Them

As a founder, you don’t want to handle accounting. At first, it seems like a money-saving strategy, but did you know it’s not sustainable in the long run 

Doing accounting cuts down productivity in building your business. Soon you realize that paying a professional to handle the accounting saves time and has benefits over the costs.

But….what if your accountant makes errors? As a business owner, you’ll have to suffer losses despite their mistakes.

The accounting could be intentional or unintentional; you should still be aware of penalties and legal rights. 

In this article, we’ll walk you through:

• What is Accounting Negligence
• What are the Penalties and Liabilities of Accounting Negligence
• How to avoid those penalties  

Let’s start with what accounting negligence

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What is Accounting Negligence

Accounting negligence is simply when an accountant fails to perform their duties in accordance with the expected accounting standards and principles, resulting in financial losses to the business.

If your accountant is :  

• Not recording entries of every transaction
• Recording revenue in the wrong way, leading to incorrect financials
• Classifying personal expenses as business deductions
• Mismanagement of documents required for tax compliance
• Providing incorrect advice on financial projections

You may end up overpaying taxes or suffer financial losses. 

What are the Penalties and Liabilities in Accounting Negligence

Accounting negligence can sink your growing business. It’s not just about keeping clear records and preventing fines, it’s about staying clear of any legal troubles, and remaining tax compliant.

Here we have listed the penalties due to accounting negligence:

1. Due to Missing Deadlines, you need to pay a 5% per month penalty on missed deadlines for filing taxes, which are missed, as taxes need to be paid quarterly upon profitability.
2. Errors in Filing Taxes: Penalties of 20% may arise from IRS or agency audits due to non-intentional errors in tax filings, though insurance can cover these, reflecting regulatory enforcement. 
3. Underpaying Taxes: Claiming improper deductions, unverified income filing, avoiding rules and underpaying taxes can cost you a 20% penalty burden even without an audit. 

Besides these penalties, you may also be liable for: 

• Paying Actual Tax:  Your company will be responsible for paying its own taxes, regardless of whether you have assigned a tax preparer to file taxes in any case.
• Cover Third-Party Fees: You are responsible for paying costs for third-party services selected by your business for filing taxes or compliance. Tax preparers are not liable for errors by third-party services and do not provide reimbursements due to their lack of control
• Review your Responsibility: As a business owner, you are accountable for reviewing accounts and forms. The tax preparer is only liable for errors they made and must reimburse for their mistakes, and ensure shared accuracy. 

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How to Prevent Accounting Negligence and Penalties

As a founder, if you find your company’s financials showing flat revenue and an unexpectedly high tax bill, that’s an early sign of negligence. 

It is possible that your accountant is improperly recognising deferred revenue upfront, misclassifying marketing expenses, and missing a quarterly estimated tax payment, leading to penalties.

Here are the steps you should follow when you notice those errors in accounting

Step 1: Check Financial Records

Review your financial statements and tax filings for errors, such as missing transactions or incorrect entries.

Step 2: Talk to Your Accountant

Ask your accountant for explanations about these errors and see if they can be resolved. Keep a record of all those discussions to support your case if issues persist.

You have asked the accountant why revenue was recognised incorrectly and why a tax payment was missed, requesting to fix these errors.. You saved the accountant’s response, which serves as evidence of negligence.

Step 3: Get a Second Opinion

You should have a double-check on errors. Hire an independent CPA to review your financials and assess if negligence occurred. CPA can identify losses, such as overpaid taxes caused by errors.

For example, you hired a CPA specialising in SaaS accounting and found that premature revenue recognition inflated profits by $10,000, resulting in $3,000 in overpaid taxes and a $1,500 penalty due to a missed payment.

Step 4: Take Legal or Regulatory Action

Consult an attorney to explore recovering damages and file complaints with the CPA boards if negligence is confirmed. Fix errors quickly, like filing updated tax returns, to avoid penalties.

You consult an attorney who advises you to pursue a claim against the accountant’s liability insurance and file a complaint with the state CPA board, while the CPA helps file a corrected tax return to reduce your tax liability.

Step 5: Improve Future Practices

Switch to a trusted accountant, have regular discussions and set clear expectations in contracts. Use regular reviews or audits to prevent errors and protect your business.

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How to prevent common mistakes in Accounting?

Getting surprised with hefty penalties can be a nightmare, taking action after the wave of penalties arrives costs losses in business.

If you suffer financial losses from an accountant’s negligence, you have to prove that the accountant had the responsibility for those mistakes. The accountant failed in serving his duty, causing you financial pain and has evidence for those damages.

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What are the Requirements and Factors to Prove Accounting Negligence?

If you have claimed against the accounting negligence with the accountant, and it does not go well, consult with your attorney.

While many accountants have high ethical standards and are committed to resolving mistakes, unfortunately, some don’t take responsibility for their mistakes without legal pressure.

To prove accounting negligence, you need to establish these legal requirements. These requirements ensure that the accountant’s failure to meet professional standards directly caused financial harm. 

Here, we have discussed those key requirements:

1. Duty of Care:

The accountant has a professional responsibility to provide services with their skills and knowledge, following accounting standards and practices.

A CPA hired to prepare tax returns owes a duty to follow IRS regulations and GAAP.

2. Breach of Duty:

Failure to meet the accounting standard by making errors, omissions, or failing to follow professional standards.

An accountant who overlooks a critical tax deadline, resulting in penalties, breaches their duty.

3. Causation:

The breach of duty directly caused the financial losses to the business. This requires showing that the loss would not have occurred without the accountant’s negligence.

If an accountant’s error in calculating payroll taxes leads to IRS fines, the error is the direct cause of the financial loss.

4. Damages:

The business suffered actual financial harm, such as penalties, interest, lost profits, or additional costs to correct errors.

A business pays $10,000 in IRS penalties due to an accountant’s failure to file a return on time.

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Which Factors influence Accounting Negligence ?

When reviewing your financial statements and spotting errors, it’s not just about fixing the numbers; it’s about understanding what went wrong, why it happened, and what the consequences might be. 

You can recover financial losses by claiming against accountant’s but it can have other damages like reputational damage and loss of trust. 

Recognising the key factors that influence accounting negligence can help you know the severity of penalties, the extent of liability, and the ability to recover losses. If you take proactive steps, considering these factors will help you create a barrier to the penalties.

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How Inkle Helps in Accounting and Filing Taxes

Accounting negligence can be disastrous for businesses, causing financial losses, penalties, losing trust and even in worst cases, leading to bankruptcy. 

As a founder with no financial background, you have to struggle with recognising revenue and managing finances. Also, as we have discussed, how accounting negligence can flip your business within a day.

In this situation, having a trustworthy partner with an expert CPAS, a diligent review process, and compliance with GAAP standards can be game game-changer.

This is where Inkle comes in.

Inkle’s all-in-one platform simplifies accounting, ensures tax compliance, and minimises risks for SaaS founders.

Inkle combines automation and expert support to deliver accurate, cost-effective accounting tailored for SaaS startups:

• Multi-Level Review in Accounting: Projects reviewed by expert bookkeeping teams in 2–3 stages for accuracy.
• Tech-Driven Deadline Management: Inkle uses rules, voice, chat, and email to track deadlines, giving alerts that avoid penalties.
• Refiling for Minor Errors: Inkle refiles to fix small mistakes in their work.

You must ensure that accountants follow GAAP and tax regulations. Negligence, like misreporting subscription revenue, risks audits or investor distrust. Inkle’s automation and CPA reviews ensure accuracy and compliance.

If you’re seeking long-term stability and expert guidance for your SaaS startup while avoiding accounting negligence, Inkle’s team is here to help.  Get in touch today for specialised support.

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Frequently Asked Questions

1. How does accounting negligence affect a SaaS company?

Accounting negligence cead to poor business decisions and damage credibility with investors who rely on accurate financial metrics like MRR and CAC. SaaS companies are particularly vulnerable since their subscription-based models require precise accounting to demonstrate growth patterns and secure continued investment.

2. What penalties might I face due to accounting negligence?

Here are some of the accounting negligence penalties are:

• Late Tax Filings: 5% monthly fine on unpaid taxes.
• Errors in Tax Filings: 20% penalty on underreported amounts.
• Underpaying Taxes: 20% penalty for improper deductions or unverified income.
• Additional Costs: Interest on unpaid taxes and potential audit fees.

3. How can I prove accounting negligence if I suffer losses?

To prove negligence, show the accountant had a duty of care, breached it by failing to meet standards, directly caused your financial loss (e.g., penalties), and provide evidence of damages like overpaid taxes.

4. What steps should I take if I notice errors in my financials?

If you notice errors in accounting, you need to fix them or recover the losses; you need evidence of the errors. Through that evidence, you need to prove that the accountant has caused errors.

These are the steps you should follow to prove negligence:

Steps to Prove:

• The accountant had a duty to perform accurately.
• Prove they failed (e.g., missed deadlines or misreported data).
• Link their failure directly to your loss (e.g., penalties or overpaid taxes).
• Provide evidence like incorrect filings, penalty notices, or financial records.

5. How does Inkle help prevent accounting negligence and penalties?

You can’t afford to survive accounting negligence and penalties. Inkle provides services and experts for managing your accounting with automates software tools.

• Multi-Level Review: Ensures accuracy in accounting records.
• Tech-Driven Deadline Management: Tracks and meets all filing deadlines.
• Refiling for Minor Errors: Corrects mistakes at minimal cost.