There's a Mistake on Your Tax Return - Should You Fix It? Check out this proposed framework for overall compliance.

• Author: Christensen, Bryon
• Position: Cover story

This article proposes a framework for deciding whether to fix a mistake found on a previously filed tax return. Rather than treating mistakes on previously filed tax returns as isolated events to be managed on an ad hoc basis--the usual and less effective approach--the proposed framework views the discovery of mistakes, and the decisions about whether to fix them, as part of an overall strategy for ensuring tax compliance. Viewed through the lens of overall tax compliance, taxpayers can most successfully resolve mistakes found on their tax returns by focusing on two actions:

* contemporaneously documenting the standard of care and diligence used in preparing the tax return; and

* ensuring that decisions about whether to fix the mistake for past years comport with that established standard of care and diligence.

An initial focus on these two inquiries, rather than getting bogged down in weighing the pros and cons of various procedures for fixing old tax returns, will help define a clear and optimal strategy for resolving the mistake. And a well-defined strategy will then help identify the appropriate procedure to use in effectively resolving the issue with the Internal Revenue Service.

The Usual Approach

Taxpayers tend to think about mistakes on their tax returns only after they have been discovered--typically months, if not years, after filing. In this context, a mistake does not refer to some intentional omission or known rough spot in completing the return. It refers to errors on the return that the taxpayer truly does not know about, the errors that come as a complete surprise when someone, for whatever reason, has to go back and review the previously filed return. In addition, this article assumes that the person identifying the mistake works for the taxpayer and not the IRS, such that the taxpayer has full discretion to decide how to manage the mistake.

In the most typical scenario, the immediate instinct upon finding a mistake is to launch a lengthy inquiry into how it happened. This inquiry can quickly devolve into an exercise in email archaeology, with the tax team randomly digging through old emails hoping that someone just happened to retain the one message that will unlock the mystery of how the mistake occurred. If the team is lucky enough to dredge up a handful of emails on the issue, it then begins the delicate work of patching them together into a narrative history of how the mistake occurred despite everyone's having acted with the utmost care and diligence.

In addition to the scramble to develop facts, finding a mistake on a tax return typically initiates a deep dive into the various procedural opportunities the IRS provides for handling the mistake. The discussion can quickly become consumed with weighing the pros and cons of amended returns, superseding returns, Revenue Procedure 94-69, Section 9100 relief, and a host of other procedures. These findings often get summarized in a tidy chart, with rows for the procedures and columns for the pros and cons.

In the worst of all worlds, the patchwork of facts and the chart of procedures are developed in parallel rather than together. The chart of procedures makes no effort to address the still-developing facts, and the search for facts proceeds with no sense of the available procedures. The result is that the mitigation efforts...