Page 1 - Penalties:To Amend or Not to Amend: Correcting Non-Compliance on Past Returns
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Penalties
BRYAN C. SKARLATOS is a Partner
at the law firm of Kostelanetz &
Fink, LLP in New York, New York. To Amend or Not to Amend: Correcting
STEPHEN A. JOSEY is an Associate at
Kostelanetz & Fink, LLP. Non-Compliance on Past Returns
By Bryan C. Skarlatos and Stephen A. Josey
ax law is so complicated that nearly everyone makes a mistake sooner or
later. What should a taxpayer do when he or she learns of a mistake on a
T previously filed tax return? Of course, if the taxpayer overpaid her tax, she
probably will jump at the opportunity to amend the return and claim a refund.
However, if the prior return underreported tax, is the taxpayer required to file an
amended return to correct the understatement? And what are the consequences
of filing an amended return? How should a tax practitioner advise a client? This
column addresses when and how a taxpayer can or should file amended returns
and how tax practitioners should approach issues relating to a taxpayer’s prior
non-compliance.
There Is No Legal Obligation to File an Amended
Return
In Badaracco, the Supreme Court noted that there is no legal obligation to file
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an amended return. Badaracco involved two consolidated cases in which taxpay-
ers filed original returns that were fraudulent. The taxpayers later filed amended
returns that were accurate and paid the tax due. Many years after the taxpayers
filed the amended tax returns and paid the tax, the IRS proposed assessments
against the taxpayers for the years covered by the amended returns. The taxpayers
argued that the assessments were outside the normal three-year statute of limita-
tions and, therefore, untimely. The taxpayers argued that the amended returns
eliminated the fraud on the original returns so that the normal rule providing
that there is no statute of limitations for assessment when there is a fraudulent
return did not apply.
The Supreme Court held that Code Sec. 6501(c)(1), which permits the
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Commissioner to assess “at any time” the tax for a year where the taxpayer has
filed a “false or fraudulent return,” applies even when an amended return that is
not false or fraudulent is later filed. Accordingly, there are no time limitations on
assessment for a tax year when a false or fraudulent return is filed, regardless of
whether the taxpayer “later repent[ed]” through an amended return. In so hold-
ing, the Court noted that the Internal Revenue Code “does not explicitly provide
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