Response: warning clients of the need to amend

Sorry for the turbo posts - I'm a bit worked up over this one.

The client provided his info in early March, and has checked in a couple of times. Tough spot indeed.

The thing is, back then, he had told me that the unit had not been rented, or only rented for 30 days or so.

I know I'm supposed to be vague, but I feel like it would help me save an angry or blameful customer situation or a bad review if I point that out.

I know I'm supposed to be vague, but I feel like it would help me save an angry or blameful customer situation or a bad review if I point that out.

I certainly disagree. If they are going to be upset/angry, that is likely to increase given a longer written response. Again, I would suggest you may offer the additional clarification orally, but not in writing.

LW25 -- Circular 230 might have something to say about what one should do in OP's situation. I would consult Circ 230 and fulfill any obligations under that either immediately before firing and simultaneously.

Yes, and Circular 230 provides relatively little instruction.

[ . . . ] I thought circ 230 said I have to notify them that they should amend to include all income.

Not exactly. Here is the text:

10.21 Knowledge of client’s omission.

A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

---31 CFR sec. 10.21 (sec. 10.21 of Circular 230) (emphasis added).

Because neither the IRC nor the Treasury Regs contain an express, general requirement to file an amended return because an error, etc., has been discovered, the practitioner might actually be committing malpractice by merely advising the client that the client "should" file an amended return -- without ALSO advising the client that there is no general legal obligation to do so "under the Code and regulations."

Commentary by another tax lawyer:

Although there is no legal obligation on a taxpayer to file an amended return to correct an error in a prior, filed tax return, there are certain obligations upon the taxpayer's tax advisors upon discovery of the error. Circular 230, Section 10.21, governing the practice of tax advisors before the IRS, provides that if a tax advisor knows that a client has made an error in a filed return for an open year, the tax advisor is required to tell the client that the filed return is not correct and to advise the client of the consequences of the error or omission. However, Circular 230 does not require the tax advisor to advise the client to file an amended return or to withdraw from representing the client if the client does not file an amended return.

[ . . . ]

Most commentators feel that there is a legal and ethical requirement on a tax practitioner to advise the client to file an amended return. It is still an open question whether a tax practitioner should inform the client that there is no legal obligation to file an amended return. [ . . . ]

--Thomas Wechter, JD, LLM, Obligations of Taxpayers and Tax-Return Preparers Regarding Amended Returns, from cpa2biz dot com (Oct. 15, 2009) (emphasis added).

This is extremely helpful - thanks!

I forced the facts from the clients to my satisfaction and the 2020 tax return has been filed with me as the preparer, including all activity (as far as I know), and the time has come to advise this client of their errors in 2018 and 2019 and to terminate the relationship.

Please rate my notification and termination:

Dear [clients],

I am required to tell you that your 2018 and 2019 tax returns may not have been filed accurately.

The inaccuracies could result in additional tax, penalties, interest, as well as additional inaccuracies or taxes due on future tax returns.

There could also be additional issues that are beyond the scope of income tax preparation and thus the consequences may be unforeseen to me.

Notice of disengagement:

As a review of our firm's current objectives and the services that we are able or willing to provide, it has been identified that [tax preparer] can no longer provide any future services to [clients].

It would be prudent for you to reach out to a tax professional as soon as possible to facilitate the filing of all of your personal and/or business income tax returns by the applicable deadlines. Failure to file the respective returns by the pertinent deadlines may result in the assessment of penalties and/or interest.

Please let me know if your new professional needs any information from me to allow for a smooth transition to their services. Thank you for your trust in me to handle your work to date.

Best wishes,

ItDepends