Question: When the IRS issued Rev. Proc. 2015-13, it gave taxpayers the opportunity to correct missed or incorrect methods of depreciation as an automatic accounting change using Form 3115, Application for Change in Accounting Method, through a §481(a) adjustment. Can a tax professional leave the annual depreciation expense off a taxpayer’s return and “save” these deductions for a later year in which an accumulation of deductions would best serve the taxpayer? Would knowingly or purposely omitting annual depreciation deductions and picking them up in a later year under §481(a) create legal or ethical implications for paid preparers?
Answer: No. You cannot intentionally omit a taxpayer’s annual depreciation deductions so that the taxpayer can use them in a year in which they would be more advantageous. Circular 230, Regulations Governing Practice before the Internal Revenue Service, requires tax return preparers be knowledgeable about the returns they prepare. Every tax professional knows that depreciation is an annual deduction that accounts for the natural deterioration of an asset. Intentionally omitting the deduction could be considered a violation of Circular 230 §10.21, Knowledge of client’s omission; §10.22, Diligence as to Accuracy; §10.34, Standards with respect to tax returns and documents, affidavits, and other papers for Tax Return Positions known to be potentially unreasonable; or §10.35, Competence.
Correcting missed depreciation due to an honest oversight is the reason why §481(a) was added to the tax code. Intentionally omitting depreciation to maximize deductions in another tax period goes against the Circular 230 standards for tax preparers and is likely inviting risk to your continuation in the profession. The §481(a) adjustment should be used by a tax preparer to provide knowledgeable salvation to the novice taxpayer who missed depreciation due to ignorance. It should not be used as an intentional disregard of the law disguised as a planning tool.