Question

Our accounting firm has won the engagement to be the new federal income tax consultant for a fortune 500 company. In the course of preparing the federal income tax returns for its tax year ending December 31, 2017, we reviewed the company's federal income tax returns for recent years. Our review discovered a large error in the company's computation of its domestic production activities deduction. The error is the result of misunderstanding the law, and was repeated on all of the recent returns. We have discussed the matter briefly and informally with the client, who has indicated that they would rather not file amended returns correcting the error. The client has also indicated that it would like a written analysis of the issue, including the chances of the issue being found by the IRS on audit and of the client prevailing on the matter if it winds up in court. To prepare for the next meeting with the client on this matter, we need to determine:

• Under the IRS rules applicable to tax practitioners, what are our ethical obligations to the client and to the IRS with regard to these mistakes, the analysis requested by the client and our advice to the client?
• Under the AICPA's standards, what are our ethical obligations to the client and to the IRS with regard to these mistakes, the analysis requested by the client and our advice to the client?

Answer 1

As per IRS a tax consultant or a practitioner who has the knowledge about an error or omission in any return, document or affidavit which has been submitted under the revenue laws of USA has the obligation to advise the client promptly with regards to such error or omission. In this case the client has decided not to file amended returns and as per IRS it is the duty of the tax consultant to advice the client the consequences of such noncompliance with law which requires filing of amended returns in case of any errors or omissions. As per the rules of IRS’s circular 230 #10.21 a tax professional is not responsible for fixing the noncompliance by the client once he has clearly notified the client about the issue and also about the resulting consequences.

As per AICPA’s SSTS no.6 a tax consultant or a practitioner, being a member of AICPA, has the duty to inform the client of the errors and omissions in previous returns. The tax consultant also has a duty to inform his client about the consequences as well as the recommended corrective action that can be taken. Most importantly, as per AICPA, the tax consultant is not allowed to inform the tax authority about any errors or omissions without the explicit permission of the client. If the client does not file amended returns then the tax consultant has the option of withdrawing from advising the client.

References:

1. Brackney, Michel and Martinelli – Ethics: Fixing common tax problems.

2. IRS Circular 230 – Ethics for tax professionals