The Amended Return and the Prior Preparer
A new client, Sofia, brings her prior-year return, prepared by another firm. Reviewing it, you spot that a $12,000 deduction was claimed twice, producing an understatement of about $3,800 in tax at her 32% rate. Sofia says, 'That was their mistake, not mine - can we just leave it? It's their problem.' She also asks whether you can amend this year's return to fix it quietly without telling anyone, and whether you have any obligation to report the prior firm. The statute of limitations on the prior year has two years left.
1. Must Sofia's prior-year error be corrected, and what is your obligation?
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The error should be corrected, but the obligation is nuanced.
- Sofia's duty: she is responsible for the accuracy of her returns. A known understatement should be corrected via an amended return; leaving it is not a defensible position simply because someone else made the error.
- Your duty: as the current preparer, you must not repeat or perpetuate a known error. You are not automatically required to amend a prior return you did not prepare, but you should advise Sofia in writing of the error and the correction path.
- If she declines to correct it, document her decision and consider whether to continue the engagement - you cannot assist in maintaining a known misstatement.
Recommended: prepare the amended prior-year return, disclose the correction, and pay the additional $3,800 plus any interest.
2. Is there an obligation to report the prior firm?
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Generally no - there is no general duty to report another preparer to a regulator for an ordinary error. Reporting is reserved for serious misconduct (fraud, repeated disregard of rules).
The proportionate response:
- Advise Sofia of the error.
- Correct it.
- Do not contact the prior firm or a regulator absent evidence of intentional misconduct or a legal requirement.
Over-reporting an honest mistake is itself unprofessional. Document your reasoning.
3. Sofia asks to 'fix it quietly' by amending this year's return. Is that appropriate?
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No. You cannot fix a prior-year understatement by adjusting the current-year return - that misstates the current year and leaves the prior year wrong.
The correct mechanism is an amended return for the prior year, which is a transparent, disclosed correction. A quiet offset in the current year would create a new misstatement and compound the problem. Explain this to Sofia and proceed with the proper amendment.