Errors and omissions frequently occur in prepared tax returns. They can range from an incorrect number accidentally entered, to a misinterpretation of a law, to a misstatement of the client’s facts. Tax preparers also often “inherit” tax mistakes made by the client’s former preparer. The errors on a prior return can affect subsequent year tax returns, including a return the new preparer is working on. This article examines preparer – and taxpayer – responsibilities when discovering an error or omission (“E /O”) on a prior year tax return.
There are two guidelines in place for tax preparers:
Circ. 230
Section 10.21 of the Treasury Department’s Circular 230, Regulations Governing Practice Before the IRS (“Circ. 230”), applies to all tax preparers. It states that if the practitioner knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, the practitioner must promptly advise the client of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.”
Under Circ. 230, the tax preparer is not obligated to inform the IRS of the E/O, or necessarily required to stop servicing a client who refuses to correct the E/O. It also notes that the taxpayer, not the tax preparer, has the ultimate responsibility for determining if prior E/O should be corrected.
SSTS No. 6
Members of the American Institute of Certified Public Accountants (“AICPA”) must also comply with Statements on Standards for Tax Services (”SSTS”). SSTS No. 6 states a CPA “should inform the taxpayer promptly upon becoming aware of an error in a previously filed return, an error in a return that is subject of an administrative proceeding, or a taxpayer’s failure to file a required return. A member also should advise the taxpayer of the potential consequences of the error and recommend the corrective measures to be taken. Such advice and recommendation may be given orally. The member is not allowed to inform the taxing authority without the taxpayer’s permission, except when required by law.”
The language in SSTS No. 6 is stronger than under Circ. 230. It advises that a CPA recommend their client to correct the E/O rather than just advise of the consequences. Again, it is the taxpayer’s ultimate responsibility to decide whether to correct the E/O. SSTS No. 6 also states that a CPA should consider whether they should withdraw from an employment relationship if the taxpayer decides not to amend a prior return or correct the E/O; the refusal may indicate future taxpayer behavior that will ultimately require the relationship to end. Moreover, if the CPA member believes a taxpayer may face possible fraud or other criminal allegations, the CPA should advise the taxpayer to consult with an attorney before taking any action.
Gary Kaplan is a member of the AICPA and adheres to the highest level of professional conduct. He takes tax compliance very seriously, and thinks you should too.
