Question

Which of the following responses is the BEST example of a practitioner reaction to Circular 230 §10.21 knowledge of a client’s omission? I cannot complete your 2016 return because it has come to my attention that for the past two years, the truck you use in your business has been borrowed from your dad, and the business vehicle expenses claimed on prior returns are nondeductible. It has come to my attention that for the past two years, the truck you used in your business has been borrowed from your dad. Unfortunately, tax law states that you have to own the vehicle before you can claim it as a business expense. Because this is not a valid expense, you will be subject to additional tax on these returns, as well as penalties and interest. It has come to my attention that for the past two years, the truck you used in your business has been borrowed from your dad. Unless you amend these prior-year returns, I will not be able to complete your 2016 return. Unfortunately, on your 2016 return, you will not be allowed to take the standard mileage rate deduction on the truck you use in your business because it has come to my attention that, for the past two years, that truck has been borrowed from your dad. I am also required to amend your prior-year returns to remove these nondeductible expenses, regardless of whether you agree to the amendments.

Answer 1

Section 10.21 of Circular 230 on Regulations Governing Practice Before the Internal Revenue Service imposes obligations on tax practitioners who discover an error or omission on a tax return, he should 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.

Hence in the given scenario , the Best reply by the tax practioner on getting aware of the fact that the assessee has made an error by claiming personal maintenance expenses of the truck owned by the assessee's father as business vehicle expenses in prior returns shall be "Unfortunately, tax law states that you have to own the vehicle before you can claim it as a business expense. Because this is not a valid expense, you will be subject to additional tax on these returns, as well as penalties and interest. "Such a reply shall appropriately ascertain the potential consequences of the error committed as well as it also limits the scope of filing of erroneous return by the practioner unless all additional taxes are paid off. Further such a reply also does not abandon the the right of the assessee to choose any other professional tax practioner ,to say, he is not bound to file any amended return as limited by the last reply on the given question.