What Happens If My CPA Makes a Mistake?

A Certified Public Accountant (CPA) is a trusted financial professional, yet even experienced individuals can make errors. Understanding the implications of a CPA’s mistake and how to address it is important for anyone relying on their services for tax preparation or financial reporting. Occasional oversights can occur, potentially leading to various complications for the client.

Identifying a CPA Error

Clients might discover a CPA error through unexpected communications from tax authorities. An IRS notice, for instance, might flag discrepancies such as underreported income, disallowed deductions, or incorrect credits, signaling an issue with the filed tax return. These notices indicate that the IRS’s records do not match the information provided on the return. Reviewing personal financial documents against prepared tax forms can also reveal inconsistencies, such as misclassified income or expenses. Errors can range from simple data entry mistakes, like transposed numbers, to more complex misinterpretations of tax law or overlooked financial details.

Financial Consequences of Errors

A CPA’s error can lead to various financial repercussions for the client, primarily additional taxes, penalties, and interest. If an error results in an underpayment of taxes, the IRS may impose a failure-to-pay penalty, typically 0.5% of the unpaid taxes per month. An accuracy-related penalty can also be assessed for negligence or a substantial understatement of income tax. Interest accrues on underpaid taxes from the original due date until the debt is fully paid. Errors can also result in lost deductions or credits, meaning the taxpayer paid more tax than legally required because eligible tax benefits were not claimed.

Steps to Address an Error

Once a potential error is identified, the first step is to contact the CPA who prepared the original documents. It is important to gather all relevant documentation supporting the suspected error, such as IRS notices, corrected financial statements, or overlooked tax forms, and present them clearly to the CPA. Open communication is key, as the CPA can review their work and determine if an error indeed occurred.

If the CPA confirms an error, the next step involves preparing and filing an amended return. For federal individual income tax, this typically requires Form 1040-X, Amended U.S. Individual Income Tax Return. This form allows taxpayers to correct previously filed tax forms, addressing changes in income, deductions, credits, or filing status. The amended return should clearly detail the changes and provide an explanation for the amendments.

Amended returns can often be filed electronically for recent tax periods, though paper filing remains an option. When filing a paper Form 1040-X, it is important to attach copies of any supporting forms or schedules that are being changed. The IRS advises waiting until any original refund has been processed before submitting an amended return, but if additional tax is owed, filing and paying as soon as possible helps minimize further penalties and interest. Processing times for amended returns can vary significantly, often taking several months. The status of an amended return can be tracked using the IRS’s “Where’s My Amended Return?” tool.

Regarding penalties and interest, the CPA might assist in requesting penalty abatement from the tax authorities. Taxpayers can request penalty relief if they can demonstrate reasonable cause for the error, meaning they exercised ordinary business care and prudence but were unable to comply due to circumstances beyond their control. The IRS offers programs for certain penalties, such as failure to file or failure to pay, for taxpayers with a clean compliance history. Requests for abatement can sometimes be made over the phone, or formally through a specific form. Thorough documentation of all communications, corrected documents, and submissions is important throughout this process.

CPA Professional Responsibilities

Certified Public Accountants are held to specific professional standards and ethical obligations, generally set by professional bodies and state boards of accountancy, requiring them to maintain competence and stay updated on tax laws and accounting principles. Their code of professional conduct outlines principles like integrity, objectivity, and due care. Due care means performing professional services with diligence, competence, and adherence to applicable standards. CPAs are expected to apply sound judgment and only undertake engagements for which they possess the necessary skills and knowledge. These responsibilities underscore the trust placed in CPAs to provide accurate and reliable financial services.

Your Role in Accuracy

Clients play an important part in ensuring the accuracy of their tax returns and financial documents by providing complete and accurate information to the CPA. This includes submitting all relevant income statements, deduction receipts, and other financial records in an organized and timely manner. Withholding information or providing incomplete data can inadvertently contribute to errors. Before signing or approving any tax returns or financial statements prepared by a CPA, clients should carefully review all documents. This review involves checking personal details, verifying income and expense figures, and confirming that all applicable deductions and credits have been properly claimed, serving as a final safeguard against potential mistakes and emphasizing the collaborative effort required for precise financial reporting.