Client omissions and diligence as to accuracy: sections 10.21 and 10.22

• Apply the section 10.21 duty when you find an error on a client's prior return
• Distinguish the duty to advise from any duty to correct or disclose to the IRS
• Describe the three areas where section 10.22 requires due diligence
• Explain when reliance on another person's work is presumed diligent under 10.22(b)

Section 10.21: knowledge of a client's omission

Section 10.21 applies when a practitioner, retained by a client on a matter administered by the IRS, knows that the client has not complied with the revenue laws, or has made an error in or omission from any return, document, affidavit or other paper the client submitted or executed. The practitioner must:

1. advise the client promptly of the noncompliance, error or omission; and
2. advise the client of the consequences under the Code and regulations.

Three points about scope matter in practice.

• Knowledge triggers the duty. The rule turns on what the practitioner knows. It does not require you to audit every prior year, but once you see the problem you cannot set it aside.
• The duty is to advise the client. Section 10.21 does not require you to amend the prior return or tell the IRS. Whether the client amends is the client's decision. Your next decision is whether you can continue the engagement, especially if the error carries into the current year.
• The error can be anyone's. It does not matter whether the client, a prior preparer, or your own firm made the mistake.

Document the advice. A short letter or email stating the error, the years affected, the consequences (additional tax, interest, possible penalties) and the options (amend, or do nothing and accept the exposure) is the evidence that you met 10.21. The AICPA tax standards contain a parallel duty for members who learn of an error, which a later lesson covers.

Section 10.22: diligence as to accuracy

Section 10.22(a) requires a practitioner to exercise due diligence:

1. in preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits and other papers relating to IRS matters;
2. in determining the correctness of oral or written representations the practitioner makes to the Department of the Treasury; and
3. in determining the correctness of oral or written representations the practitioner makes to clients on any matter administered by the IRS.

The second and third items reach beyond returns. A statement to a revenue agent that "the client has no foreign accounts" must be checked before you make it. So must an email telling a client that a payment is deductible.

Reliance on others: 10.22(b)

Except as modified by sections 10.34 and 10.37, a practitioner is presumed to have exercised due diligence when relying on the work product of another person, if the practitioner used reasonable care in engaging, supervising, training and evaluating that person, taking account of the nature of the relationship. For a reviewer this means the presumption is earned, not automatic. A reviewer who signs off on a return prepared by a first-week associate with no training and no review notes is unlikely to show reasonable care in supervision.

The cross-references matter. Section 10.34(d) sets the rule for relying on client information, and 10.37(b) sets the rule for relying on another adviser's opinion in written advice. Those more specific rules control in their areas.

Building diligence into the file

• Tie every number on the return to a source document or a client representation, and mark which is which.
• Record questions you asked and the answers, with dates.
• Run a prior-year comparison and write a short explanation for large changes.
• When you rely on a colleague's schedule, note who prepared it and what you checked.

The staff training plan guide shows how firms build the training record that supports a 10.22(b) presumption.

Depreciation found on a prior-year return: Ortega Landscaping