Page 2 - Penalties:To Amend or Not to Amend: Correcting Non-Compliance on Past Returns

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either for a taxpayer’s filing, or for the Commissioner’s practical reasons to file amended returns. Most taxpayers
acceptance, of an amended return; instead, an amended properly feel that they should pay the correct amount of
return is a creature of administrative origin and grace.” tax, even if the error or omission on the previous return
Subsequent cases have cited Badaracco for the proposi- was due to an innocent mistake. Filing an amended return
tion that there is no statutory provision requiring or even is the best way to correct a prior incorrect assessment so
authorizing amended returns. 3 that the additional tax can be paid. And, as mentioned
above, if a taxpayer mistakenly overpaid tax, the Treasury
Regulations contemplate that the taxpayer will file an
Tax law is so complicated that nearly amended return to claim a refund. 6
Amended returns also can be good strategic choices in
everyone makes a mistake sooner certain circumstances. In many cases, amended returns can
or later. What should a taxpayer do eliminate the possibility of civil accuracy-related penal-
when he or she learns of a mistake ties or, in cases where the original return was fraudulent,
on a previously filed tax return? amended returns can significantly negate the possibility
of a criminal prosecution.
If the original incorrect return did not involve fraud,
the Code gives the taxpayer an opportunity to file a quali-
Despite the absence of a statutory provision requiring fied amended return or “QAR.” Tax shown on a QAR
amended returns, Treasury Regulations do discuss amended will reduce the amount of the “underpayment” for the
returns in a few places. One regulation provides that taxpayer for the year at issue. This means that no penalty
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amounts paid on a “so called” amended return are included will be due under Code Sec. 6662 with respect to any tax
when computing a “deficiency” of tax. Another regulation shown on a QAR. Effectively, it is as if any tax shown on
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provides that when tax is overpaid, a claim for refund of a QAR was properly reported to begin with, at least for
any overpayment shall be made on a Form 1040X amended penalty purposes.
tax return. Two other regulations provide that taxpayers Of course, a QAR must be “qualified.” To be “quali-
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“should” file amended returns under certain circumstances. fied,” an amended return must be filed before certain
Reg. §§1.451-1(a) and 1.461-1(a) state that: events occur that could affect the taxpayer’s tax liability.
For example, a QAR must be filed before the taxpayer
If a taxpayer ascertains that an item should have been is contacted by the IRS concerning an examination or
included in gross income in a prior taxable year, he investigation, a tax shelter promoter is contacted about a
should, if within the period of limitation, file an tax shelter reflected on the taxpayer’s return, a passthrough
amended return and pay any additional tax due. entity is contacted by the IRS with respect to an item that
Similarly, if a taxpayer ascertains that an item was is reflected on the taxpayer’s return, a summons is issued
improperly included in gross income in a prior taxable with respect to the taxpayer, or a settlement initiative is
year, he should, if within the period of limitation, file announced with respect to a listed transaction reflected
claim for credit or refund of any overpayment of tax on the taxpayer’s return. The idea is that if the taxpayer
arising therefrom. comes forwards and corrects his or her tax liability before
the IRS learns of the prior mistake or omission, the tax-
Reg. §1.461-1(b) contains nearly identical language stating payer will not be liable for accuracy-related penalties on
that an amended return should be filed if a liability or deduc- any underpayment that was voluntarily corrected. 8
tion was incorrectly included or omitted on a prior-year Another important condition for a QAR is that the
return. Despite these regulatory exhortations, there are no original return cannot have involved fraud. A taxpayer
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regulations expressly requiring a taxpayer to file an amended cannot eliminate the fraud on an originally filed return and
return to correct an omission or error on a prior return. thereby avoid a fraud penalty simply by filing an amended
return. This rule is similar to the decision in Badaracco
Practical Reasons to File Amended where the Court determined that the filing of an amended
return cannot reinstate the normal three-year statute of
Returns limitations for assessment after an original fraudulent

return was filed. 10
Even though amended returns are not required as a mat- This does not mean that a taxpayer should never con-
ter of law, there are, nevertheless, often good ethical or sider amending an original fraudulent return. In fact, it

20 JOURNAL OF TAX PRACTICE & PROCEDURE FEBRUARY–MARCH 2019