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


           FEBRUARY–MARCH 2019                         © 2019 CCH INCORPORATED AND ITS AFFILIATES. ALL RIGHTS RESERVED.  19
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