Recovery of Interest on a Tax Underpayment Caused by a Tax Advisor’s Negligence

Three views have developed on the issue of whether there can be a recovery of interest on a tax underpayment caused by a tax advisor’s negligence. The traditional view, which is still the majority view, permits the recovery of such interest as one of the elements of recoverable damages. Under this view, since the negligence caused the payment of the interest, it is an element of recoverable damages under normal tort doctrine. The minority view absolutely prohibits the recovery of interest. The reason for this position is that, in the minority’s view, the recovery of interest would result in a windfall for the plaintiff. The plaintiff would have both the use of the unpaid tax money as well as a recovery of the interest paid for the use of that money. According to the minority view, the payment of interest is not damages since it is merely a charge for the use of money that really belonged to the government rather than the plaintiff. A third, more modern and intermediate view permits the recovery of such interest only to the extent the interest charged by the government exceeds the interest earned by the use of the tax underpayment.The article explores each of the three views (Part II). It then traces the development of the views and presents a tally of the jurisdictions following each view (Part III). An analysis of the views follows with a conclusion that the modern, intermediate view is best ( Part IV). In conclusion, the article argues that the modern intermediate view should be adopted universally, the minority view needs to be changed and that the majority view can attain the modern view’s results by slightly altering its approach.