Key Takeaways
- If practitioner discovers error/omission on prior return, must advise client immediately.
- Must inform client of the nature and consequences of the error.
- Not required to inform the IRS directly (client privilege).
- Must explain how to correct the noncompliance.
- Knowingly failing to inform client is disreputable conduct.
- Consider whether to continue representation if client refuses to correct.
Knowledge of Client's Error (Section 10.21)
Why This Matters for the Exam
Discovering a client's error on a prior return is a common scenario that every practitioner will face. The exam tests whether you know your duty to advise the client, the limits of that duty, and what constitutes disreputable conduct.
Expect at least 2-3 questions on handling client errors.
The Discovery Scenario
You're preparing a client's 2024 return when you discover a significant error on their 2023 return (which you or someone else prepared). What do you do?
Required Actions Under Section 10.21
When a practitioner discovers an error or omission on a client's return:
| Required Action | Description |
|---|---|
| 1. Advise the client promptly | Inform the client that an error exists |
| 2. Explain the nature of the error | What was wrong (income omitted, deduction incorrect, etc.) |
| 3. Explain the consequences | Potential penalties, interest, additional tax |
| 4. Explain how to correct | Amended return, voluntary disclosure, etc. |
What Is NOT Required
| Not Required | Explanation |
|---|---|
| Notify the IRS directly | No duty to report client to IRS |
| File amended return without consent | Client decides whether to correct |
| Terminate engagement immediately | Continue unless client refuses to correct |
Key Point: The duty is to the client, not to the IRS. You advise the client and let them decide how to proceed.
The Client Privilege Protection
Communications between a practitioner and client about errors are generally protected. You are not required to breach this confidentiality by reporting to the IRS.
However, the privilege has limits:
- Does not protect criminal activity.
- Does not protect future tax shelter advice.
- Can be waived by the client.
What If the Client Refuses to Correct?
If the client refuses to take corrective action after being advised:
| Consideration | Action |
|---|---|
| Can you continue? | Evaluate whether continued representation is appropriate |
| Future returns | Cannot sign a return you know to be incorrect |
| Withdrawal | May need to withdraw from engagement |
| Documentation | Document your advice and client's refusal |
Practical Tip: Document your advice in writing (letter or email to client). This protects you if questions arise later.
Disreputable Conduct
Knowingly failing to inform a client of an error or omission is classified as disreputable conduct under Section 10.51.
| Violation | Consequence |
|---|---|
| Not advising client of discovered error | OPR investigation, possible sanctions |
| Continuing to sign incorrect returns | Censure, suspension, or disbarment |
| Helping client conceal the error | Criminal referral possible |
Real-World Scenario
Scenario: While preparing your client's 2024 return, you discover that their 2022 return (prepared by another firm) failed to report $30,000 of 1099 income.
- Your duty: Advise the client of the error, explain the consequences (penalties, interest, ~$6,000+ additional tax), and explain how to correct (file amended return).
- Not your duty: Report to the IRS.
- If client refuses to file amended return: Consider whether you can continue representing them. Document your advice.
On the Exam
Expect 2-3 questions on client errors, typically:
- Duty Questions: "What must a practitioner do upon discovering an error?"
- IRS Notification Questions: "Is a practitioner required to notify the IRS?"
- Refusal Questions: "What should a practitioner do if the client refuses to correct?"
The key is to remember: Advise the client (not IRS), explain consequences and how to correct, document your advice.
What must a practitioner do upon discovering an error on a prior client return?
Is a practitioner required to notify the IRS of a client's error?
What constitutes disreputable conduct regarding client errors?