Representation before the IRS · Supporting documentation
Prior and subsequent tax returns
tax year · reviewed 2026-08-19 · I. Ohu
The rule
A tax return is a one-year document reporting positions that are frequently multi-year facts. Basis, carryovers, elections, accounting methods, depreciation lives and passive activity accounts all originate in one year and produce consequences in others. That makes the adjacent returns evidence in the year under review — sometimes the only evidence — and it makes the effect of an adjustment rarely confined to the year adjusted.
The preparer’s reliance position on those returns is defined. Under Reg. § 1.6694-1(e)(2), a preparer may rely in good faith without verification upon a return previously prepared by the taxpayer or another preparer and filed with the IRS — the regulation’s own example being that a preparer preparing an amended return need not verify the positions on the original. Three qualifications follow immediately, and they are the operative part. The preparer may not ignore the implications of information furnished or actually known. The preparer must make reasonable inquiries if the information as furnished appears incorrect or incomplete. And the preparer must confirm that the position being relied upon has not been adjusted by examination or otherwise.
That last requirement has no counterpart in the general reliance rule and is specific to prior returns. A carryover figure taken from a filed return that was subsequently examined and adjusted is not a figure a preparer may rely on, and confirming its status is an affirmative step rather than an assumption.
Reg. § 1.6694-2(e)(4) reinforces the point from the other direction: a review of the prior year’s return is one of the elements of the normal office practice that the reasonable cause and good faith exception rewards.
How it works in practice
Get the transcripts, not just the returns. A client’s copy of a prior return shows what was filed. An account transcript shows what happened to it — whether it was adjusted, when, and by how much. The requirement to confirm that a relied-upon position has not been adjusted is satisfied by the transcript, not by the client’s file copy. Where the client cannot supply returns, a return transcript or Form 4506-T fills the gap; disclosure to the practitioner runs on the authorization already on file, under IRC § 6103(e) and the power of attorney.
Look forward as well as back. Subsequent returns matter for three reasons. They show whether a disputed treatment was repeated, which affects both the exposure and the argument. They show whether a carryover was actually used, which determines whether an adjustment to the earlier year produces cash consequences or merely moves a number. And where a method has been applied consistently across years, that consistency is itself evidence about what the taxpayer intended and what the records supported.
Map the correlative adjustments before conceding anything. An adjustment that disallows a deduction in one year may increase a carryover into the next, or reduce basis and increase gain on a later sale, or change a limitation computed by reference to the earlier figure. Conceding an issue without tracing it forward can cost the client more than the issue is worth — or, occasionally, less, which is equally worth knowing before the conversation.
Watch the refund period on the other years. A claim for credit or refund is limited to three years from the filing of the return or two years from payment of the tax, whichever is later (IRC § 6511(a)). Where an adjustment in the year under examination produces an overpayment in an adjacent year, the claim for that year may already be barred. Identifying that early sometimes changes the strategy in the examined year entirely.
A prior return can be an admission, and it can also be an error. Where the client reported the same item the same way for six years and the seventh is challenged, the earlier returns support consistency — but if the treatment was wrong, they establish that it was wrong six more times. This is the calculation to run before offering the prior returns as evidence, and it is the reason a practitioner should read them before an examiner asks for them.
Amended returns do not verify themselves. The regulation’s example is that a preparer preparing an amended return need not verify the positions on the original. That permission does not extend to ignoring what is visible: if the original is obviously wrong in a way the amendment does not address, the reasonable-inquiry duty is engaged.
The carryover that had been adjusted
A new client brings four years of returns showing a net operating loss carryover of substantial size. The current preparer takes the closing balance from the most recent return and carries it forward.
The account transcripts show that year two was examined and the loss reduced by nearly half. Reg. § 1.6694-1(e)(2) permits good faith reliance on a previously filed return, but expressly requires the preparer to confirm that the position relied upon has not been adjusted by examination or otherwise. That confirmation was the step skipped, and it is a step, not an assumption. Ordering account transcripts at the start of every new engagement is the practice that makes it automatic rather than a matter of remembering.
The concession that cost more elsewhere
Hyacinth Berglund-Nwosu is examined on a year in which she claimed a large repair deduction. The examiner proposes capitalising it. The amount at issue in the examined year is modest and the representative is inclined to concede.
Tracing it forward changes the picture in her favour and complicates it in another direction. Capitalisation creates basis and depreciation deductions in later years, some of which are already filed and would need amendment to claim — and the refund period for the earliest of those is close to expiring. Conceding without a plan for the subsequent years converts a small adjustment into a permanent loss of the deduction. The right sequence is to compute the multi-year effect first, then decide whether to concede, and to protect the adjacent years with claims if necessary.
Six years of the same treatment
Alaric Fernsby-Oduya has reported a category of income the same way since 2019. The 2024 return is examined and the treatment is challenged. His representative considers offering the earlier returns to show consistency.
Consistency helps only if the treatment is right. If it is defensible, the earlier returns support that this was a considered position applied uniformly, which is relevant to penalties as well as to the merits. If it is wrong, producing them tells the examiner where five more years of adjustments are, and the assessment period may still be open on some of them — and on any year with a substantial omission, open for six years. The analysis has to run before the returns leave the office, not after.
How this has changed
The express permission to rely on a previously filed return, with the three qualifications attached to it, arrived with the 2008 preparer penalty regulations — rewritten after the 2007 legislation raised the preparer standard and extended the penalty beyond income tax returns. Before that, the position was inferred from general reliance principles; it is now stated, including the requirement to confirm that the relied-upon position has not been adjusted.
What has changed the practice more is access. Transcript delivery through e-Services and the practitioner priority channels made it realistic to check the account status of several prior years at the start of an engagement, where obtaining the same information by mail once took weeks. The requirement to confirm that a position has not been adjusted was arguably aspirational when it was written; it is now a matter of ordinary diligence, and a preparer who does not check has less to say about why not.
Exam focus
Know that a preparer may rely in good faith without verification on a return previously prepared and filed, that an amended return preparer need not verify the original’s positions, and that the preparer must nonetheless not ignore implications, must make reasonable inquiries where information appears incorrect or incomplete, and must confirm that the relied-upon position has not been adjusted by examination or otherwise. Know that a review of the prior year’s return is an element of a normal office practice for reasonable cause purposes.
Check yourself
1. A preparer relies on a carryover figure from a previously filed return. What must the preparer confirm?
A. That the taxpayer’s copy matches the filed original B. That the position relied upon has not been adjusted by examination or otherwise C. That the prior preparer was credentialed D. Nothing; reliance on a filed return is unqualified
Answer: B.
2. A preparer prepares an amended return. What is the position on the original return’s items?
A. Every item must be independently verified B. The preparer may rely in good faith without verifying the original’s positions, subject to the duty not to ignore implications and to inquire where information appears incorrect C. The original must be re-created from source documents D. The preparer may not prepare an amended return for a return they did not prepare
Answer: B.
3. Why do subsequent returns matter in an examination of an earlier year?
A. They are irrelevant; each year stands alone B. They show whether a treatment was repeated, whether a carryover was used, and whether a method was applied consistently C. They automatically extend the assessment period D. They must be produced whenever the earlier year is examined
Answer: B.
4. An adjustment in the examined year produces an overpayment in an earlier year. What limits the recovery?
A. Nothing; correlative adjustments are automatic B. The IRC § 6511 period for that year — three years from filing or two from payment, whichever is later C. The collection statute for the examined year D. A six-year period in all cases
Answer: B.
5. Which is an element of the normal office practice the preparer penalty regulation rewards?
A. Owning current software B. A review of the prior year’s return C. Retaining returns for six years D. Employing a credentialed reviewer
Answer: B — along with checklists, methods for obtaining information from the taxpayer, and review procedures.
Change log
- Initial draft.
Related topics
- Financial documents and expense records (e.g., cancelled checks or equivalent, bank statements, credit card statements, receipts, brokerage records) 3.2.4.a
- Legal documents (e.g., birth certificate, divorce decrees, lawsuit settlements) 3.2.4.b
- Transcripts from IRS (e.g., access to and use of e-services) 3.2.2.e
- Business entity supporting documents (e.g., partnership agreement, corporate bylaws) 3.2.4.e