Unfortunately, there are often times that business owners or CFOs are met with tax news they don’t want to hear. Equally unfortunate, tax accountants often come bearing that bad news. Today’s post covers what you should do when your tax accountant sheds light on an inherited error from a previously filed tax return.
First, it’s worth mentioning that as accountants we are required by the American Institute of CPAs to bring previous errors to attention, as cited in the AICPA State on Standards for Tax Services, rule number 6. Although it may seem like we are telling you about these errors to ruin your day, it may bring you some peace of mind to know that while we have to disclose it to you, we’re prohibited from mentioning it to the IRS without your permission, unless legality reasons arise. That being said, it is up to the client (that’s you) to decide whether or not you will correct the error, though we highly suggest you do.
3 Steps to Help You Correct the Error with the IRS:
1. Work with your accountant – give them your consent to disclose the issue with the IRS. Disclosing the issue right away may reduce the fines, penalties or required steps to correct the issue.
2. Amend the return – your accountant has the capability to amend tax returns for many reasons that require a correction. By amending the return first, it will reduce any acquired penalties compounded through interest. The longer you wait – the more you may have to pay.
3. While these errors are usually a result of simple mistakes, sometimes your accountant may uncover fraud issues. If your accountant believes the error may result in fraud charges, you are able to work with an attorney prior to taking action on the error to protect yourself.
While it is nearly impossible to safeguard 100% against errors, there are some actions you can take to prevent them from happening in the first place:
1. Choose a reputable accounting firm you trust. Don’t make a last minute decision when it comes time to having your taxes prepared. Spend time doing your due diligence – research firms and CPAs online, talk with your family, friends and colleagues to see if you can be introduced to someone they trust as a referral.
2. Work closely with your chosen accountant when it comes time to prepare your taxes. Answer their questions honestly and with detail so nothing gets lost in translation. At the same time, make sure you’re asking questions and digging a bit deeper to be clear they understand.
3. Before signing on the dotted line, give the paperwork a final overview, you may be able to catch simple mistakes before they are sent off to the IRS.