6. Khiem is a CPA practicing in Alexandria, Virginia. Kristen is a new client wh

Question

6. Khiem is a CPA practicing in Alexandria, Virginia. Kristen is a new client who left her prior years’ returns and documentation for Khiem to review. Khiem has been engaged to prepare the current year’s tax return. While reviewing the prior year’s return, he noticed that a number was transposed when reporting a charitable deduction. The return incorrectly showed the deduction as $12 when the correct amount was in fact $21. Her AGI was $986,542. When Khiem discussed this error with Kristen, she did not want to amend the prior year’s return. If Khiem prepares the current year’s return without Kristen filing an amended return, do you think he would be in violation of SSTS?

Explanation / Answer

If the client chooses to file an amended return, a member may continue representation. If, however, the client declines to file an amended return, the member must confront several issues. First, except “when required by law” (that is, the client is poised to commit a future crime or fraud), the member may not disclose an error or omission to the IRS without the client’s permission (SSTS no. 6, paragraph 4). Second, while there is no blanket requirement that the member withdraw from representation, withdrawal may be appropriate if, in the member’s judgment: (1) a client’s failure or refusal to file an amended return or otherwise correct an error “may predict future behavior that might require termination of the relationship” (SSTS no. 6, paragraph 8), or (2) future tax return preparation by the member will perpetuate the original error or omission (see SSTS no. 6, paragraph 12—for example, the original tax return reflects an inaccurate tax basis associated with business equipment that the client intends to depreciate going forward). If the member decides to continue the relationship with the client, the member should take appropriate measures to make sure not to repeat the error in subsequent returns (paragraph 5). For purposes of SSTS no. 6, an error does not include a mistake or omission that does not significantly affect the taxpayer’s tax liability, which the member, in his or her professional judgment, may determine (paragraphs 1 and 13)

Use Form 1040X (PDF), Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040 (PDF), Form 1040A (PDF), Form 1040EZ (PDF), Form 1040NR (PDF), Form 1040NR-EZ (PDF), or to change amounts previously adjusted by the IRS. However, do not include any interest or penalties on Form 1040X; they will be adjusted accordingly. You can also use Form 1040X to make a claim for a carryback due to a loss or unused credit; however, you may also be able to use Form 1045 (PDF), Application for Tentative Refund, instead of Form 1040X. You cannot file an amended tax return electronically under the e-file system. See Where To File in the Form 1040X Instructions (PDF) for the address to mail your amended return.

If you owe additional tax for a tax year for which the due date for filing has not passed, file Form 1040X and pay the tax by the due date for that year (without regard to any extension of time to file) to avoid penalties and interest. If the due date falls on a Saturday, Sunday, or legal holiday, filing the form and paying the tax is timely if filed or paid the next business day.

Generally, to claim a refund, you must file Form 1040X within 3 years after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date.

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