Page 2 - A Tax Return Do-Over?

the IRS with the information it needs by the due date. Since the taxpayer was under no obligation to file his return prior to the due date, the IRS is not disadvantaged in any way.
For the purposes of a superseding return, the due date includes any valid extension. Therefore, a taxpayer who files a valid extension but ultimately files the return sometime before the expiration of the extended filing date will have until that extended due date to file a superseding return.
The benefits of filing a superseding return go far beyond the ability to correct errors without risk of an accuracy-related tax penalty. Because a superseding return is treated as the tax- payer’s “first return,” it can be utilized to make or change bind- ing elections that would otherwise not be open to revision. This is perhaps even more valuable than avoiding penalties, especially for corporate and business filers, where a single missed election can have devastating consequences that affect future tax years. In fact, court cases and IRS rulings have held that a superseding return even allows for the revocation of an election that is otherwise irrevocable.
Superseding returns have other time-altering powers. If a taxpayer is required to file an information return but fails to do so, a superseding return can be used to rectify the error. For example, taxpayers with a requisite interest in a controlled foreign corporation are required to attach IRS Form 5471 to their income tax return. If a taxpayer fails to file Form 5471, she is subject to a $10,000 late filing penalty, even if the failure was not intentional. To avoid the penalty, she would have to incur the expense (and heartache) of trying to demonstrate to the IRS that the failure was due to reasonable cause, often a difficult standard to satisfy. If, however, the taxpayer catches the omission of Form 5471 after filing her original return but before the due date has passed, she can file a superseding return and attach the required Form 5471—making it timely filed.
To make the most of superseding returns, CPAs should con- sider filing extensions even for taxpayers who will ultimately file their returns on the original due date. By doing this, such taxpayers will have extra time to catch mistakes and correct them without negative consequences. While it is likely imprac- tical for CPAs to do this for all of their clients who file their returns by the original due date, it is likely a good strategy for some of them. For example, an individual taxpayer who is eager to file by April 15 because he is expecting a refund may want to file an extension to October 15, which may allow him to cor- rect any errors made on the original return by use of a super- seding return. Similarly, filing an extension may be good practice for a partnership that files Form 1065 and issues K-1s by the original due date. Such a partnership may itself receive amended K-1s from higher-level partnerships after making its original fil- ings, and such revisions may then subject it to filing obligations that it had not previously foreseen. For example, the partnership
may need to file Form 8886 to disclose a reportable transaction. The failure to do so could subject the lower level partnership to a $10,000 penalty, but if the partnership is able to file a super- seding tax return, it can avoid that penalty.
The Qualified Amended Return
As for taxpayers who miss the window for filing a superseding return, all hope is not lost. Such a taxpayer can still mitigate the accuracy-related penalties for an understatement of tax by filing a qualified amended return. Generally, a qualified amended return is filed after the due date for the original return has passed but before the IRS has taken certain actions that either put the taxpayer on notice of a possible understatement or otherwise indicate that the IRS is already on the path to finding the understatement on its own. Thus, a qualified amended return must be filed before any of the following has occurred:
n IRS contact with the taxpayer regarding a civil or criminal examination of the tax return at issue;
n IRS contact with any person regarding a tax shelter exam- ination under IRC section 6700 for a tax shelter in which the taxpayer has participated;
n In the case of a pass-through item, IRS contact with a pass- through entity regarding the item at issue;
n IRS service of a summons relating to the tax liability of a person, group, or class that includes the taxpayer (or pass- through entity) with respect to an activity for which the tax- payer claimed any tax benefit; or
n IRS announcement of a settlement or compromise initiative with respect to a listed transaction that the taxpayer participated in that year (further restrictions apply in the case of an undis- closed listed transaction).
When a taxpayer properly files a qualified amended return, the IRS will not assert the accuracy penalty with respect to any additional liability. If the taxpayer’s understatement on the original return is due to fraud, however, the taxpayer will not avoid penalties by filing a qualified amended return.
The different paths to compliance after the filing of an imper- fect tax return highlight the need for careful consideration by taxpayers and their advisors of how one goes about correcting past errors. These options also require that taxpayers and CPAs consider filing extensions even in cases where it is perhaps counterintuitive to do so. Finally, taxpayers who cannot correct their past mistakes by one of the methods described here— such as taxpayers whose omissions were fraudulent or spanned many years—should consider other paths to compliance, including a corrective filing pursuant to the IRS’s voluntary disclosure policy. q
Michael Sardar, JD, is a tax controversy attorney with Kostelanetz & Fink, LLP, New York, N.Y.
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