Tax practice responsibilities.

• Author: Sonnier, Blaise M.

CIRCULAR 230, SECTION 10.21, AND SSTS NO. 6: STANDARDS RELATING TO TAXPAYER ERRORS AND OMISSIONS

TAX RETURN PREPARERS GENERALLY REVIEW prior-year tax returns in preparing the current-year tax return for new and existing clients. Statement on Standards for Tax Services (SSTS) No. 3, Certain Procedural Aspects of Preparing Returns, recommends that CPAs "refer to the taxpayer's returns for one or more prior years whenever feasible" in preparing or signing a return for a later period.

In reviewing prior-period returns, a tax return preparer may discover an error or omission. A preparer may also discover an error on a return in reviewing a position recommended by another adviser concerning a transaction engaged in by the taxpayer. When errors are discovered, Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and SSTS No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, impose standards of conduct on CPAs who discover an error or omission in a prior-year tax return.

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AICPA members are required to comply with the Statements on Standards for Tax Services in their practice. The Statements apply to all tax practice matters, not just federal income tax engagements, while Circular 230 applies only to matters under IRS jurisdiction. Additionally, some state boards of accountancy require CPAs licensed in their state to comply with AICPA standards.

What to Do When an Error Is Discovered

SSTS No. 6 states that a CPA "should inform [the client] promptly upon becoming aware of an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer's failure to file a required return." SSTS No. 6 also recommends that the CPA advise the client about the potential consequences of the error and recommend corrective measures. The CPA may give the recommendation either orally or in writing.

Section 10.21 of Circular 230 imposes similar obligations on tax practitioners who discover an error or omission on a tax return. Both Circular 230, Section 10.21, and SSTS No. 6 require that the practitioner make the client aware of the error or omission and its potential consequences. The practitioner has this obligation whether the error resulted in an underpayment or overpayment of tax. Additionally, the obligation exists whether the error relates to work done by the practitioner or another tax professional.

While both Circular 230 and SSTS No. 6 require the practitioner to advise the taxpayer of the potential consequences of the error or omission, SSTS No. 6 goes even further by advising CPAs to recommend to their client measures to correct the error or omission. Circular 230 does not impose this affirmative duty on tax practitioners. If the error or omission may subject the client to allegations of fraud or other criminal...