25.2 Knowledge of Client's Omission
Key Takeaways
If practitioner discovers error/omission on prior return, must advise client promptly.
Must inform client of the nature and consequences of the error.
Not required to inform the IRS directly (§10.21 requires advising the client only).
Explaining how to correct the noncompliance is good practice, not a §10.21 requirement.
Willfully failing to advise a client of a known error violates §10.21 and is sanctionable.
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 when a failure can be sanctioned.
The Discovery Scenario
You're preparing a client's 2025 return when you discover a significant error on their 2024 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 |
Good practice (not a §10.21 requirement): explain how the error could be corrected, such as by an amended return.
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
Section 10.21 requires advice to the client, not a report to the IRS. Separately, some practitioner-client tax advice is protected by a limited federal confidentiality privilege (IRC §7525).
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.
Sanctions
Willfully failing to advise a client of a known error or omission violates Section 10.21, and a willful violation can be sanctioned under Section 10.52.
| 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 2025 return, you discover that their 2023 return (prepared by another firm) failed to report $30,000 of 1099 income.
- Your duty: Advise the client of the error and explain the consequences (additional tax, penalties, interest). Good practice: explain how to correct it (an 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
Question types to practice on client errors:
- 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 the IRS), explain the consequences, and document your advice; explaining how to correct is good practice.
What must a practitioner do upon discovering an error on a prior client return?
Report to IRS immediately
Advise the client of the error
File an amended return without consent
Terminate the engagement
Is a practitioner required to notify the IRS of a client's error?
Yes, always
Only for material errors over $10,000
No, only advise the client
Only if fraud is involved
Which of the following can lead to Circular 230 sanctions regarding client errors?
Advising client to file amended return
Willfully failing to advise a client of a known error
Documenting advice in writing
Withdrawing from engagement
Sections you finish are checked off in the contents.