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Mistakes on Tax Return Preparation


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Errors and omissions in preparing tax returns can occur easily. You might accidentally enter a number incorrectly, misinterpret a law, or misconstrue the client’s facts. Later, before an IRS audit, you might discover the mistake, raising gut-wrenching questions: Do you call the mistake to your client’s attention? Do you advise the client to file an amended tax return? If so, by acknowledging the mistake, have you essentially conceded that you have committed malpractice? What, if anything, can you do to limit your professional liability?

 

No matter when or how you become aware of a mistake, what makes it all the more exasperating is that the outcome is not within your direct control. For example, when a prior-year understatement of tax liability is discovered, notwithstanding your counsel, the client, being primarily responsible for the understatement, ultimately dictates whether to submit an amended return. A client’s recalcitrance to do so may exacerbate the mistake, resulting in the client’s incurring perhaps even more interest and a larger penalty. Sometimes you might even “inherit” a mistake if an error made by another preparer on a prior return has a continuing effect going forward, including on a return you are preparing.

 

While taxpayers have a legal duty within any applicable statute of limitations to pay the correct tax, neither the IRC nor the Treasury Regulations require them to unilaterally correct tax return submission errors or omissions. Instead, the regulations state that upon discovering an error or omission involving an understatement of income or an overstatement of deductions, a taxpayer “should” file an amended tax return and pay any tax due.

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