CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresEasy
A tax preparer discovers an error in a client's previously filed tax return that resulted in a material understatement of tax liability. The client is unaware of the error. Under Circular 230, what is the preparer's responsibility?
- AThe preparer must immediately notify the IRS of the error.
- BThe preparer has no obligation to act since the error was on a previously filed return.
- CThe preparer must advise the client of the error and the potential consequences.
- DThe preparer must correct the error by filing an amended return without consulting the client.
Show answer & explanationAnswer & explanation
Correct answer: C. The preparer must advise the client of the error and the potential consequences.
Under Circular 230, if a practitioner discovers an error or omission on a client's previously filed return, they must promptly advise the client of the error and the potential penalty consequences. The decision to amend rests with the client.
Why the other options are wrong
- A. The preparer's primary duty is to the client; notifying the IRS directly would violate client confidentiality.
- B. Circular 230 explicitly outlines the practitioner's responsibility to advise the client of such errors.
- D. An amended return cannot be filed without the client's authorization, as it is the client's return.
Circular 230 Error Discovery on Prior Returns
If a practitioner becomes aware of an error or omission on a client's previously filed return, they must promptly advise the client of the error and its potential consequences.
- Duty to inform client, not the IRS.
- Client decides whether to amend.
- Must inform of potential penalties.
Memory trick: When an 'Old Error' is found, 'Tell the Client' the truth.