Return professionally prepared incorrectly, what the professional should do?

[kpangelinan]

If a CPA or Enrolled Agent discovers that he/she prepared a return incorrectly, what are his/her steps to correct it to protect himself/herself from any legal or IRS problems?

[Uncle Sam]

Professional Responsibility

The first thing that should be done is to determine WHO actually caused the error - the professional or the client. Your question is amibiguous and doesn't disclose who caused the error to begin with.
IF the professional - then it's incumbent upon him/her to inform the client of this and amend the returns, and cover any additional charges such as penalties and interest (although I do recognize the interest portion is debatable)
IF the client-then the client should contact the tax preparer and request an amended return be prepared, and recognize that an additional fee should be paid.

[outwest]

What I do..

1. Nail down the problem, know exactly what the effect is, prepare a amended return.
2. Call the client, be open, apologize, put best light on it, " While looking at this issue, I realized this might affect you, I checked and found out my fears were true." etc.
3. Don't charge for the amendment
4. Consensus is offer to pay related interest or penalties.
5. Express frustration this got by you and steps you are taking to prevent this in future.

Nothing will prevent a legal problem for sure. If the client refuses to fix a problem, you've got to consider if you want to continue with them.

Everyone makes mistakes.

[JohnH]

Good Advice

In addition to the above, you might want to consider following a policy to review a few client returns each year once the rush is over. How you choose them is up to you - maybe by income level, complexity, or at random. In any case, when you discover that you made an error you can explain to the client that this problem surfaced as a part of your routine quality control procedures.

When explaining the problem and steps to be taken to amend, you can put a positive interpretation on your offer to pay the interest and any penalties you can't get abated. You can point out to them that reliveing them of the penalties and interest puts them back in the position they would have been in had the return been prepared correctly in the first place. Getting them to focus on the fact that the unpaid tax was not theirs to begin with can go a long way toward helping them understand the situation.

[kpangelinan]

Professional made an error...

If it was the professional who made the error and he/she has contacted the client to amend the return at no additional charge, however the client does not want to change the return. How does the preparer protect himself from scrutiny in the future should the return be audited.

[kpangelinan]

If client refuses to amend.....

What if the client refuses to amend the return after doing all of the above? Is the preparer still open for unethical or illegal preparation or does contacting the client relieve them of responsibility?

[Jiggers]

Depends

What if the client refuses to amend the return after doing all of the above? Is the preparer still open for unethical or illegal preparation or does contacting the client relieve them of responsibility?

What was the substance of the error?

If I made an error such as leaving off some income that I overlooked in the client's information, I would amend the return and give it to the client to file.

Then that is the client's decision.

If the client wouldn't mail the return, I would have to refuse to do the following year's return.

[Bees Knees]

What if the client refuses to amend the return after doing all of the above? Is the preparer still open for unethical or illegal preparation or does contacting the client relieve them of responsibility?

Its not unethical or illegal to make a mistake on a return.

Unless, of course, you did it on purposes.

Fill out the amended return, send it to the client free of charge. It is now the client's responsibility to do the right thing. Nobody is going to penalize you for attempting to correct your own mistake.

[sea-tax]

My advice is similar to BK in that I would amend the return to correct the error and mail the return to the client with some sort of mail verification. Then I would let it go. You have done all you can do . You can lead a horse to water but you can't make them drink,

[MAMalody]

Ultimately, when a client is filing paper returns, you do not really know if they do so or not, although, they generally do. I did nave once client that did not do so for three years. Oh well.

Along with the above advice: 1. prepare the return and provide it to the client - gratis, 2. offer to pay any unabated penalties and interest; I would ask them when they show up for the 2007 interview how it went. I did not receive a copy of the IRS notice showing penalties and interest and I wanted to make sure that you were properly reimbursed. If they did not file the return, I would decline to do the 2007 return. You have essentially established that they are not interested in filing correct returns and it could be possible that they are also withholding information that you don't know about. If they said, don't worry about it I took care of it, I would give them the benefit of the doubt and reduce their 2007 fee by what I could compute as the approximated amount of P & I.

[Chief]

Error

Does Circular 230 address this situation. Is the preparer required to pay interest and penalties for a mistaken return that is the preparer's fault? I would but am I required to do so from the IRS standpoint?

[kpangelinan]

Required to pay the P/I?

Chief makes a good point. Are we required to by Internal Revenue Guidelines or does it become a civil matter at that point?

[erchess]

Penalty and Interest

Even the largest and most well known storefront preparation firm refunds penalty and interest so I do too. In fact, I pay double but only against the fee for future work I do for the client and only if they cooperate with me in getting the situation correctly straightened out. I also have an extra cost plan they can buy at preparation time that will cause my software company to pay the additional tax plus penalty and interest if the situation is due to my error. This is very popular with my clients.

In regard to following the rules, I tell my clients that neither they nor I can be blamed for the fact that tax laws are what they are but we both have to follow them to the best of our ability. We're also allowed to use our voting and other political activities to work for what we view as appropriate changes. But I won't work with clients who are not willing to follow the rules.

[ChEAr$]

paying interest/penalties

AS to the question of what does 230 require, it does not.

Different preparers have different policies on the issue. I will pay penalties, IF
assessed, and generally I can get client out of these if it were due to my error;
but not if due to his error.

Interest? Well, client has had the use of the money at a rather nice interest
rate already, cheaper than credit cards or even home equity loan interest.

[Chief]

erchess

What software do you use? I view these plans generally as a way to get money out of our clients with remote possibilities of ever paying out.