How to file rental when prior year is wrong?

The rental filing on Sch E in 2021 (when the rental started) had the following errors:

- Prior year cost basis was wrong, it uses the entire purchase price without taking the land value out
- The business percentage was wrong (taxpayer lives in the same house)
- Expenses were wrong (utilities not included in rent but deducted, percentage used to divide mortgage interest and property tax)

The 2021 was not filed by me. I am supposed to file the 2022 which is the 2nd year of rental. I would like to know what my options are.

- If the client does not want to amend, can I file the current year? If so how? If I treat the rental started from 1/1/2022? If I do this, and when the 2021 was audited or somehow amended, do I need to amend 2022 and all following years?

- If client wants to amend but does not want to send E-file. I doubt they will send the return out. Can I file the return based on the amended result?

If the client does not want to amend, can I file the current year?

Prepare the 2022 return correctly. You are not responsible for the 2021 errors and there is no requirement to amend.
Don't change the date placed in service.

If the client does not want to amend, can I file the current year?

Prepare the 2022 return correctly. You are not responsible for the 2021 errors and there is no requirement to amend.
Don't change the date placed in service.

HowardS: Thanks for the advice! Follow up questions:

- About the rental loss and accumulated depreciation, do I transfer the wrong amounts as filed in 2021, or the amounts as if there were done correctly? Or both are acceptable?

- If I carry over the wrong amounts as filed in 2021, the errors will be reflected in accumulated rental loss and depreciation, and when I sell the property, these numbers will be used. If the errors are discovered, am I not responsible to make corrections in my returns? It will be more difficult with the years go by, given some year had loss and some year had gain. The years are connected for return with rentals.

A related question is: the statute of limitation is still three years despite that the results are carried over to the current year?

If client refuses to amend and file the prior year, he has revealed his nature as a tax cheat or tax evader. Consider that this incident won't be the last. There's enough honest taxpayers out there to work with; no need to cow to the dregs.

Dup post

I agree with Frankly. Either the 2021 gets amended to reflect the correct numbers, or the client needs to go elsewhere.

My understanding of the SOL is that it applies to every number on a return. That means the basis is subject to audit at anytime down the road, as is any suspended loss carryforward. You are at risk, as you have knowledge that there is a problem if you carry forward the 21 amounts without correcting them.

Form 3115 can be your friend here, as it looks like you are talking about multiple years.

Clients often wonder why I advise retaining all records for all years relating to a rental property.

Form 3115 can be your friend here, as it looks like you are talking about multiple years.

OP says the 2022 filing is year 2. 3115 doesn't apply.

do I transfer the wrong amounts as filed in 2021, or the amounts as if there were done correctly

You don't want to compound the error by propagating it forward. You might want to note any excess depreciation taken for future recapture considerations.

Either the 2021 gets amended to reflect the correct numbers, or the client needs to go elsewhere.

That's a personal decision. This TaxAdvisor article has an excellent discussion on this topic.
https://www.thetaxadviser.com/issues/2013/jul/bailliff-jul2013.html

In most cases, however, assuming that the error is not a continuing item and that the refusal to amend does not appear to indicate larger ethical issues with respect to the client, the tax practitioner will usually be able to reach a reasonable level of comfort with continuing the relationship.

Life is too short to waste time dealing with clients that make "mistakes" that reduce their tax but refuse to correct them.

I wonder if the 2021 return was self-prepared by the client or by a "professional?" If it was self-prepared and the client refuses to amend 2021 I would disengage. Even if it was done by someone with a PTIN I'd have second thoughts about keeping the client if he or she was that adamant about not wanting to fix 2021.

If you are desperate for fees, can't pay your bills, keep this client and he will certainly send
his cheaten buddies along to you.
Frankly is right - Howard is wrong (bad advice) - advise him in the strongest terms
to amend or you will have nothing to do with him. If he refuses fire him, even
file a 211 against him. You do have a duty under Circular 230 to do so, unless
you want to invite the risk of losing your EA license.
If he gets caught he will turn on you in a flash, he'll say "he said it was Ok to do nothing"
imagine facing that charge in Court.

If you are desperate for fees, can't pay your bills, keep this client and he will certainly send
his cheaten buddies along to you.
Frankly is right - Howard is wrong (bad advice) - advise him in the strongest terms
to amend or you will have nothing to do with him. If he refuses fire him, even
file a 211 against him. You do have a duty under Circular 230 to do so, unless
you want to invite the risk of losing your EA license.
If he gets caught he will turn on you in a flash, he'll say "he said it was Ok to do nothing"
imagine facing that charge in Court.

Novacpa,

I got your "strongest terms", and thanks for everyone to participate! I will summarize the advices as below, please tell me if this reflects our consensus.

- If the prior years' incorrect returns (done by others) affect the current year return (data carried over, etc), we have to fix (amend, form 3115, etc) them before we can continue. If client refuses to fix, we cannot do business with the client.

- If the prior years' incorrect returns (done by others) do not affect the current year return, we need to point out the errors and it is the client's decision to fix or not to fix. We can do business with the client legally and ethically (whether you want to do the business with client, it is a different matter).

- We do not have obligations to file a 211 or otherwise report the prior years' incorrect returns to the IRS.

advise him in the strongest terms
to amend or you will have nothing to do with him. If he refuses fire him, even
file a 211 against him. You do have a duty under Circular 230 to do so, unless
you want to invite the risk of losing your EA license.

Really? Where in circular 230 does it say all that?

Section 10:21 says:

§ 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.

I am amazed at all these posts about requiring the 2021 return to be amended or dropping the client. The OP states twice that the 2021 return, while wrong, had a rental loss suspended to 2022. If the client doesn't want to file an amended return which will only change the amount of carryover loss I would be fine with that. In fact I don't see any reason to file an amended return which only changes the carryover loss.

Calculate the 2021 return correctly to establish the correct amount of loss carryover (assuming of course that there still is a loss) and use that for 2022. Move along.

I suppose if the changes are so drastic that there is no longer a carryover loss this answer might change.

I suppose if the changes are so drastic that there is no longer a carryover loss this answer might change.

In this particular case, since the business percentage was wrong (taxpayer lives in the same house), the amendment will change the personal itemized deduction (they did itemize), but I get your point that if the amendment does not result in a tax change, but only the carryover amounts, we do not need to amend but carry over the correct amounts.