Grassi & Co., a New York-based accounting firm, is facing a professional malpractice lawsuit over sales tax guidance it provided without a separate engagement agreement.
In a June 5 ruling, the Appellate Division, First Department, allowed Island Consolidated and affiliated companies to proceed with claims that Grassi’s sales tax advice in early 2015 led to significant expenses and changes to their business operations.
According to the court, Grassi had been retained under written engagement agreements to perform specific services: preparing and auditing financial statements and preparing corporate and partnership income tax returns. These agreements also included a clause requiring notice and mediation before any lawsuit could be filed.
The agreements did not mention sales tax advice. While they allowed for “Additional Services” through a separate written agreement, no such agreement was created when Grassi, at the plaintiffs’ request, provided sales tax advice in early 2015.
Years later, in 2021, Island Consolidated faced a New York State tax audit. The plaintiffs allege that Grassi again became involved—this time representing them in defense of the sales tax guidance it had given in 2015. That continued involvement became central to the court’s conclusion that the firm’s representation extended into the audit process, supporting the application of the continuous representation doctrine.
Grassi moved to dismiss the complaint, arguing the plaintiffs failed to meet the contract’s pre-litigation requirements and that the claims were time-barred. The court disagreed. It found that because sales tax advice was not listed in the original scope of services, the mediation clause did not clearly apply. The court also ruled that the 2021 representation was sufficient to toll the statute of limitations.
The decision also held that it would be premature to dismiss any of the plaintiffs’ claims for damages at this early stage, especially given the allegations of gross negligence.
For financial advisors and accounting professionals, the ruling serves as a cautionary reminder: offering services outside the agreed scope—without formal documentation—can create long-tail liability. Firms should be diligent in ensuring all additional services are covered by written agreements, particularly in areas with regulatory or tax implications.
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