Treasury Circular 230 Ethics: Due Diligence, Conflicts of Interest & AI Tax Research
Follows an Enrolled Agent / CPA tax practice through a high-stakes filing season involving divorcing S-Corp co-owners, an undiscovered prior-year $180,000 ERC/basis omission, an aggressive fee proposal, and an unverified LLM tax citation.
Circular 230 §10.21 Knowledge of Client Omission & Prior-Year Return Errors
During late-February onboarding at Sterling Tax Advisors, Lead Enrolled Agent Sarah Jenkins reviewed the prior-year Form 1120-S and Schedule K-1s for newly retained S-Corporation client Alpha & Beta Solutions LLC, co-owned by David and Rachel Vance. Their prior preparer had filed a 2021 Form 941-X claiming a $180,000 Employee Retention Credit (ERC) refund for the S-Corp, yet Sarah's detailed review revealed a critical omission: the prior preparer never amended the 2021 Form 1120-S to reduce wage deductions under IRC §280C(a) or reflect the resulting $180,000 pass-through increase in the shareholders' stock basis schedules. The error, if uncorrected, would lead to substantial future tax liabilities, potentially disallowing legitimate distributions or creating phantom gain on stock sales. Sarah knew this wasn't just a technical oversight; it was a ticking ethical time bomb.