Duty of Consistency Doctrine: Determining How to Resolve Past Errors and Withstand IRS Challenges

The tax treatment chosen in one year can influence a taxpayer's liability in multiple years. Mistakes, timing, and other positions taken on returns can have a ripple effect across multiple years. Without the DOCD, taxpayers manipulating the statute of limitations could vary chosen tax treatments to their advantage.

You will not find this in the Internal Revenue Code; the DOCD principles have been defined by the courts. R. H. Stearns Co. v. United States states the DOCD is "... the principle that no one shall be permitted to found any claim upon his own inequity or take advantage of his own wrong." (R. H. Stearns Co. v. United States, 291 U.S. 54 (1934)).

A violation of the DOCD includes three elements. First, an item is reported or a representation made in a particular year. Second, the IRS must rely on the representation made. Finally, the taxpayer subsequently changes the original item or representation, after the statute of limitations has tolled, in a way that benefits the taxpayer and harms the IRS. The DOCD allows the IRS to hold the taxpayer to the original position.

Tax practitioners often encounter mistakes made on prior returns from new clients, and their own errors. Understanding how best to rectify these situations is critical for tax professionals.

Listen as our panel of federal income tax experts discusses practical applications of the duty of consistency doctrine, including correcting or adhering to past mistakes.