A tax practitioner uses a software program to prepare a client's tax return. The software contains a known bug that, under certain circumstances, incorrectly calculates a specific deduction, resulting in a material understatement of tax. The practitioner is aware of the bug but believes it is unlikely to be detected by the IRS. Under Circular 230, what is the practitioner's ethical obligation?
- ADisclose the software bug on Form 8275, 'Disclosure Statement,' and submit the return.
- BInform the client about the software bug but proceed with the incorrect calculation if the client agrees.
- COverride the software's incorrect calculation and manually enter the correct deduction, or refuse to sign the return.
- DUse the software's output as is, as the software vendor is ultimately responsible for errors.
Show answer & explanationAnswer & explanation
Correct answer: C. Override the software's incorrect calculation and manually enter the correct deduction, or refuse to sign the return.
A tax practitioner cannot rely on a software program if they know it contains a bug that results in a material understatement of tax. Circular 230 requires practitioners to exercise due diligence to ensure the accuracy of tax returns. Knowing about an incorrect calculation and failing to correct it violates this duty. The practitioner must either manually correct the error or refuse to sign the return.
Why the other options are wrong
- A. Disclosing a known, material error that leads to an understatement (which the preparer has the ability to correct) is not a substitute for correcting the error itself. This would be akin to knowingly filing a false return with a disclosure.
- B. Client agreement does not absolve the practitioner of their ethical and legal duty to prepare an accurate return; a known material error cannot be intentionally included.
- D. The practitioner is ultimately responsible for the accuracy of the return they sign, not the software vendor.
Practitioner Due Diligence (Software)
Practitioners must exercise due diligence in preparing tax returns, which includes ensuring accuracy even when using tax preparation software, and correcting known errors.
- Cannot rely on software if known to produce incorrect results.
- Responsible for the accuracy of the return, regardless of software use.
- Must override or manually adjust for known software errors.
- Failure to do so violates Circular 230 due diligence requirements.
Memory trick: Software's a tool, but your due diligence rules.