How long till IRS finds obvious errors?

[DonPriebe]

Have a new client. Last year's return was manually prepared and signed by an "accountant". It contained two fairly obvious errors on the 1040:

Deduction of several hundred dollars in rental loss with AGI over $150K.

$400 arithmetic error in subtraction of itemized deductions to get taxable income.

I would have thought that at least the arithemetic error would have be caught by this time, but the client says they received no correspondence. Do you think it is more likely that ...

a) IRS missed the errors (or hasn't found them yet), or

b) IRS corrected the errors and client didn't notice change in refund?

[Chief]

Don,

about 18 months. Your client has no records I suppose. If it was me I would go ahead and prepare a 1040X. And state the reason in Explanation part of the form. If I didnt know the client or had reason to question his credit standing I would get paid first. It would then be up to your new client if he wants to get the mess straightened out before IRS comes knocking on his door.

[Gretel]

There are a number of obvious errors that never even notice. Maybe it is better now. When I bought my business 6 years ago I was shocked to find out about quite some obvious errors my conversation program caught right away. None of these errors were addressed be the IRS.

[ChEAr$]

How they do it

Years ago I had a new client and he brought me previous year's return. On schedule c
there was an obvious mis subtraction in cost of goods sold of 10,000$ which increased
cost of good sold and thus lowered profits, thus lowering income tax AND SE tax.

he never ever heard a word from IRS, which led me to believe then that all their data entry
people do is enter numbers into a program which doesn't at that time do arithmetic.

But of course these days we have seen notices which correct those type of errors.

One way to approach it is to verify what was filed and tax assessed via eServices and then
inform client and let him decide (of course!)

[Jade06]

If I were you I would advise him he needs to do an amended return. This way he can avoid that future problem. Eliminate the fear of a promblem by fixing it.

Jade!!

[taxmandan]

Have a new client.
b) IRS corrected the errors and client didn't notice change in refund?

I would have client sign an 8821 and then talk to PHL about his return information from that year to see what is on the record. Compare what he says he filed with the IRS record to see if any changes have been made or if he needs an amendment done.

[Snaggletooth]

Point Them Out

I would point them out and offer to do an amended return. If he refuses, you can then take the position that the prior year is none of your business. And of course, if he receives a notice, it won't be your business then either.

Or is it? Is there some professional responsibility upon a tax preparer to become responsible for correcting known errors from prior years even if he didn't create the errors??

[Gretel]

I don't think so, Snag. You can be hired to file an amended tax return now or taxpayer could have hired you to correct it right away. Our resposibility to educate the client of the mistake, the consequences and that he is required to file an amended return. End of story.

[GIMoe]

Agree

I agree with Gabriele with one exception. If the mistake/miscalculation on the previous year's return was on something that would affect the accuracy of this year's return, then I would have to insist on correcting that first.

[erchess]

Deficiency

There was a question on the exam for my first course in taxes that appeared pretty much word for word on my EA Exam. The question proposed that you were reviewing client records for the previous year and discovered that a deficiency existed on a client's return. The question was, what is your obligation under the tax code. The right answer was that you explain things to the client. You let them know what it would cost to solve the problem now and what it could cost down the road if the IRS should discover the situation. Then you let the client decide what to do.

At my first employer we would always mail the client an amended return when we became aware of a deficiency. Our firm was obligated to pay penalty and interest and might have been obligated to pay the additional tax if the person had purchased the right product. Our obligation to pay stopped getting larger as of the day the Amended Return was in the client's hands. (The situations where we discovered deficiencies without clients coming to us about them were always our mistakes. I don't think we would have taken any official notice if news coverage of the person had made us aware of income he had not reported to us.)

Anyway because I was confused about the difference between IRS requirements and the practices of my employer, I got the question wrong on my first exam but it was an easy question when I faced it on the EA exam.

[outwest]

They're watching closely now..

Client got a "we changed your return" letter this week for 2006 return.

HORRORS! I had one estimate at $841 and the IRS had $840. You got it: a $1 reduction in the refund..

[Luis Mopeo]

Circular 230

Circular 230, section 10.21. (with blah blah blah removed for easier reading)

A practitioner who knows that the client has not complied with revenue laws or has made an error or omission must advise the client promptly, and must also advise the client of the consequenses.

There's nothing in Circular 230 about an obligation to correct a client's error. Obvisously, that would not relieve the preparer if the error was made by him or her.

[Chief]

IRS Finding Errors

about 18 months. Your client has no records I suppose. If it was me I would go ahead and prepare a 1040X. And state the reason in Explanation part of the form. If I didnt know the client or had reason to question his credit standing I would get paid first. It would then be up to your new client if he wants to get the mess straightened out before IRS comes knocking on his door.

I just met with a client yesterday and the IRS had sent him a letter concerning the omission of about $6.000 in dividends on his 2005 return. So the time period varies.

[mblatour]

about making corrections

I am also currently faced with the problem of a prior year returns mistake. I am preparing an '06 return for a client, but I also need to amend their '05 return to accurately prepare the '06 return. But I just realized that '04 return wasn't done correctly, so therefore the '05 numbers won't be right either if '04 is not amended as well. How the hay am I supposed to deal with this? The client is going to owe for '06, and owe additional tax/penalty/interest for the correction of the '05 return. His '04 return was a real mess from what he tells me and I certainly don't want to touch it, but I need to report a number from his state return and the preparer only filed one state when he was supposed to file 2 states (I need info. from the state he didn't file).

This is one situation that I am so overwhelmed about!