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How to handle an untrue, incorrect or incomplete business tax return

Reference this checklist for guidance

Mark Sellner, CPA, JD, LLM (taxation) | August 2020 Footnote

Editor's note: Updated July 28, 2020

Many middle-market, privately-owned businesses outsource the preparation of their business tax returns rather than prepare them internally. Nevertheless, they remain responsible to file true, correct and complete business tax returns.

What should a corporate officer, partner or LLC member designated to sign the business tax return do if there are concerns that it is wrong? This article provides a checklist the business might follow to determine if the business tax return is wrong and, if so, whether and how to correct it.

Business tax return signature requirement

Even when the business tax return preparation process is outsourced, a corporate officer for a C or S Corporation, a partner in a partnership, or a limited liability company member of an LLC must sign the business tax return, affirming:

“Under penalties of perjury, I declare that I have examined this return, including accompanying schedules and statements, and to the best of my knowledge and belief, it is true, correct, and complete.”

For a C or S Corporation, the business tax return must be signed and dated by the president, vice president, treasurer, assistant treasurer, chief accounting officer or any other corporate officer authorized to sign.1 Oddly enough, a tax manager is not authorized to sign the business tax return unless that person is designated an officer of the company. This sometimes results in a tax manager also holding a title of assistant controller or assistant treasurer, solely for the purpose of signing business tax returns.

For a partnership or LLC, its business tax return must be signed by a partner or LLC member.2

Minnesota tax law requires that a business tax return be signed by someone designated by the corporation or partnership.3

A true, correct and complete business tax return

When the corporate officer, partner or LLC member is not a tax specialist, how do they examine the business tax return, including accompanying schedules and statements, and declare that it is true, correct and complete? They do so to the best of their knowledge and belief.

For practical purposes, that may mean relying on the business tax return preparer. The key is to make reasonable inquiries about business tax return positions, and to consult the business tax return preparer’s reviewer regarding uncertainties. Ultimately, the CPA firm partner responsible for the business tax return engagement should stand behind the work.

Under Treasury Circular 230 Section 10.35 Competence, a practitioner must possess the necessary competence to engage in practice before the IRS, and that competent practice requires the appropriate level of knowledge, skill, thoroughness and preparation necessary for the matter for which the practitioner is engaged. Practitioners may become competent in a variety of ways, including, among other things, consulting with experts in the relevant area. It would be prudent for a business to take a similar approach.

The AICPA Statements on Standards for Tax Services No. 6 Knowledge of Error: Return Preparation and Administrative Proceedings sets forth the applicable standards for a member who becomes aware of an error in a taxpayer’s previously filed tax return.

A member should inform the taxpayer promptly upon becoming aware of an error in a previously filed return. A member also should advise the taxpayer of the potential consequences of the error and recommend the corrective measures to be taken. In that case, a business generally should take corrective measures by filing an amended business tax return to correct an error.

However, the AICPA guidance states that an error does not include an item that has an insignificant effect on the taxpayer’s tax liability. Whether an error has no more than an insignificant effect on the taxpayer’s tax liability is left to the professional judgment of the member based on all the facts and circumstances known to the member. That should be explored by the business.

Substantial authority for tax return positions

To avoid tax return penalties, tax return positions generally must meet a level of substantial authority.4 The substantial authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts.5

There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority.6

When the corporate officer, partner or LLC member is not a tax specialist, how do they analyze the law and apply the law to the relevant facts to determine whether substantial authority exists?

Again, that may be by relying on the business tax return preparer. The key is to make reasonable inquiries about business tax return positions, and to consult the business tax return preparer’s reviewer regarding uncertainties. Ultimately, the CPA firm partner responsible for the business tax return engagement should stand behind the work.

If a disagreement cannot be resolved with the CPA firm, a third-party expert might be consulted. This is particularly prudent with significant, big-dollar business tax return positions and transactions outside of the ordinary course of business, such as those that are marketed as primarily tax-advantaged investments.

Requirement to amend a business tax return

The Internal Revenue Code specifies that taxable income is computed on the basis of the business’s taxable year, by reference to the annual period on the basis of which the business regularly computes its income in keeping its books.7

If it is determined that income was erroneously reported in, or omitted from, an earlier year, a correction is to be made by the filing of an amended return.8

Likewise, if it is determined that a deduction was erroneously claimed in, or omitted from, an earlier year, a correction is to be made by the filing of an amended return.9

Minnesota tax law requires a taxpayer filing an amended federal tax return also to file a copy with the Minnesota Department of Revenue within 180 days.10

Suggested business tax return checklist

In assessing the risk of signing and filing an untrue, incorrect or incomplete business tax return, a checklist approach may be helpful. Consider this:

Planning meeting

Ask the CPA firm that is preparing the business tax return to describe its tax practice quality control policies and procedures, including:
  1. Whether they have sufficient, qualified personnel to prepare and review the business tax return.
  2. Whether the preparer and reviewer have appropriate tax and industry training.
  3. Whether the preparer and reviewer will work efficiently, competently and in accordance with all applicable professional standards, laws and regulatory requirements.
  4. Whether specialists within and outside the firm are designated to serve as authoritative sources.
  5. Whether procedures are provided for resolving differences of opinion between the preparer and reviewer.
  6. Whether the signer as paid preparer of the business tax return is at a sufficiently senior position in the CPA firm to assess the truth, correctness and completeness of the business tax return.

Business tax return preparation process

Agree with the CPA firm preparing the business tax return upon:
  1. The scope and timing of business tax return information requests from the business.
  2. A timeline for delivery of the business tax return to allow adequate time to review, discuss and timely file the business tax return.

Pre-filing meeting

Ask the CPA firm to describe:
  1. Issues that arose during the preparation and review of the business tax return.
  2. The resolution of those issues.
  3. The documentation of substantial authority for tax positions in the business tax return.

Ultimately, the onus is on the business

Even when businesses outsource the preparation of their business tax returns, they remain responsible for filing true, correct and complete business tax returns. Therefore, a collaborative effort with the tax return preparer, reviewer and partner should be undertaken to ensure the truth, correctness and completeness of the final product.

Mark Sellner consults with other CPAs and their clients on business and executive tax matters, including S Corporation and partnership taxation and the tax consequences of buying and selling a business. He is a member of the Minnesota Society of CPAs, where he has received the R. Glen Berryman Excellence in Teaching Award and the Distinguished Service Award, and the Florida Institute of CPAs. You may reach him at Sellner-Tax-Consulting-LLC@outlook.com or 612-508-4107.

1 IRC Section 6062 Signing of Corporation Returns
2 IRC Section 6063 Signing of Partnership Returns
3  Minn. Stat. 289A.08 Subd. 10 Filing of Proper Return
4  IRC Section 6662 Imposition of Accuracy-Related Penalty on Underpayments
5  Reg. Sec. 1.6662-4(d)(2) Substantial Authority Standard
6  Reg. Sec. 1.6662-4(d)(3) Determination of Whether Substantial Authority is Present
7  IRC Section 441 Period for Computation of Taxable Income
8  Reg. Sec. 1.451-1 General Rule for Taxable Year of Inclusion
9  Reg. Sec. 1.461-1 General Rule for Taxable Year of Deduction
10 Minn. Stat. 289A.38 Subd. 7 Federal Tax Changes