Filing Amended and Current Returns in Cases of Past Noncompliance: How Not to Make Matters Worse
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COL. COLUMNS I tax practice & procedure
Filing Amended and Current Returns in Cases of Past Noncompliance
How Not to Make Matters Worse
By Megan L. Brackney
When a CPA discovers a taxpayer’s past noncom- SSTS 6 further states that if a taxpayer asks a CPA to prepare
pliance, there are both ethical and practical ques-
tions to answer. The last thing a CPA should want to do in this situation is turn a manageable issue into a serious problem. Although these issues have many nuances, there are some basic principles to follow in deciding how to address past noncompliance by clients and how to handle the filing of tax returns that are currently due.
What Ethical Standards Apply to CPAs When a Client Has Been Noncompliant?
There is no obligation for a taxpayer to file an amended tax return; there is such no requirement in the Internal Revenue Code (IRC), Treasury Regulations, court decisions, or other guidance. It may be to one’s advantage, however, to file an amended return to correct past noncompliance. Some methods for correcting non- compliance are discussed briefly below.
Although the taxpayer may not have a duty to file an amended return, the CPA may have a duty to recommend that he do so. This duty is governed by Treasury Department Circular 230, Regulations Governing Practice before the Internal Revenue Service, section 10.21, and AICPA Statement on Standards for Tax Services (SSTS) 6, Knowledge of Error: Return Preparation and Administrative Proceedings. Circular 230, section 10.21 provides that “a practi- tioner who ... knows that the client has not complied with the revenue laws of the United States or has made an error in or omis- sion from any return ... must advise the client promptly of the fact of such noncompliance, error, or omission,” and “must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.”
Likewise, SSTS 6 requires that a CPA inform the taxpay- er promptly upon becoming aware of an error in a previous- ly filed return, an error in a return that is the subject of an administrative proceeding, or a failure to file a required return; advise the taxpayer of the potential consequences of the error; and recommend the corrective measures to be taken. Therefore, the AICPA’s standards of conduct require that the CPA actually recommend that the taxpayer amend her return, while Circular 230 does not go that far.
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the current year’s return while the taxpayer has not taken appro- priate action to correct an error in a prior year’s return, the CPA should consider whether to withdraw from preparing the return and discontinue the professional relationship. Similarly, if a CPA is rep- resenting a taxpayer in an administrative proceeding with respect to a return that contains an error the CPA is aware of, the CPA should request the taxpayer’s agreement to disclose the error to the taxing authority. Lacking such agreement, the CPA should consider whether to withdraw from representing the taxpayer in the admin- istrative proceeding and whether to continue the professional rela- tionship with the taxpayer. Of course, a CPA is not allowed to inform the taxing authority without the taxpayer’s permission, except when required by law.
The Explanation to SSTS 6 expands upon the question of with- drawal from the engagement and explains that a CPA may opt to do so because a “taxpayer’s decision not to file an amended return or otherwise correct an error may predict future behavior that might require termination of the relationship” (para. 8). Accordingly, even though the language of SSTS 6 suggests an obligation to withdraw, it is within the CPA’s discretion whether to do so or not. Furthermore, the Explanation also states that:
Whether an error has no more than an insignificant effect on the taxpayer’s tax liability is left to the professional judgment of the member based on all the facts and circumstances known to the member. In judging whether an erroneous method of accounting has more than an insignificant effect, a member should consider the method’s cumulative effect, as well as its effect on the current year’s tax return or the tax return that is the subject of the administrative proceeding (para. 13).
Thus, if a CPA believes the error on the prior return is not material—that is, it has no more than an “insignificant effect on the taxpayer’s tax liability”—the CPA is not required to advise the client to correct the past noncompliance.
What Are Some Considerations for Advising a Client on Filing an Amended Return?
Aside from ethical considerations, recommending the fil- ing of an amended return might also be to the client’s bene-


































































































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