When preparing your IRS tax return it has to be complete and accurate based on the information of the current year. Mistakes in past years cannot be “fixed” in the current year. Phrases such as “at the end of the day,” “it all works out,” or “it nets to zero” should not be used when preparing tax returns. Each year standing alone is a principle the IRS frequently uses when auditing tax returns. Therefore, for example, if you incorrectly recognize income in a past year you cannot simply recognize less income in the current year. Another common example is that a missed deduction in a prior year cannot be “caught up” or used in the current year. If you notice a mistake or something was done incorrectly you have to file an amended tax return to fix the prior year. In some cases you may be past the deadline to file an amended return; however, even in this scenario adjusting the problem in the current year is not an option. This principle even goes so far as to sometimes cause you to continue a mistake. If you choose an improper accounting method in a prior year you may have to continue using the incorrect method. In order to change to the correct method you will likely have to file for an accounting method change or possibly amend the prior year returns.
Overall, when preparing your tax returns you have to make sure you are consistent with prior years methodologies and carryovers, while at the same time only reporting the current year information. If you have questions about changing your accounting method, past return mistakes, or if the IRS is using this principle against you in an audit, contact us at Hone Maxwell LLP today. Although, the principle of “each year standing alone” cannot be changed there are ways to mitigate the consequences. As always, you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.