CPA obligations for addressing errors and omissions.

• Author: Wilson, Peter S.
• Position: Certified public accountant

The implementation of Financial Accounting Standards Board Interpretations No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, and the change in the tax return preparer penalty standards under Sec. 6694 have resulted in increased scrutiny of tax return positions taken by taxpayers and tax practitioners alike. This heightened scrutiny may result in the discovery of errors or omissions on prior-year tax returns. Both Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers Before the Internal Revenue Service, and AICPA professional standards impose obligations on CPAs who encounter these errors or omissions.

Circular 230 [section]10.21 provides that a CPA, attorney, enrolled agent, or enrolled actuary retained to provide federal tax services who discovers an error or omission with respect to any federal tax (not just income taxes) must promptly advise the client of the error or omission and the consequences under the Code and regulations of the error or omission. The [section]10.21 obligations are not limited to practitioners preparing returns, so the discovery of an error or omission in the course of a tax consulting or advisory engagement will also trigger its requirements.

In addition to Circular 230, CPAs must consider the requirements of AICPA Statement on Standards for Tax Services No. 6, Knowledge of Error: Return Preparation (SSTS 6). Like Circular 230 [section]10.21, SSTS 6 requires advising the client of the existence of an error or omission. SSTS 6 goes beyond [section]10.21 by requiring that the CPA recommend corrective measures. If the client refuses to take corrective action with respect to a prior-year return, SSTS 6 requires a CPA retained to prepare the current-year return to consider withdrawal from the representation.

While these two professional standards appear straightforward, a CPA must evaluate a number of issues to be able to advise a client of the consequences of a prior year's error or omission. A methodical approach to evaluating and addressing these issues helps to ensure that the CPA fulfills these obligations.

* First, confirm that an error or omission in fact exists. While this would seem self-evident, it is not uncommon for practitioners to begin evaluating the matters described below before confirming the relevant facts. What may appear to be an error may simply be a misunderstanding caused by incomplete...