Page 4 - Penalties:To Amend or Not to Amend: Correcting Non-Compliance on Past Returns

PeNALtieS

prior non-compliance or force a client to file amended is suggestive of future illegal or unethical behavior by the
returns. Moreover, a practitioner can continue to file taxpayer. 17
accurate returns for a taxpayer on a current basis even if
the taxpayer decides not to file an amended return to cor- Conclusion
rect prior non-compliance. Nevertheless, there are certain
ethical rules that govern a tax practitioner’s duty when he The law is clear that taxpayers are not legally required
or she learns that a client has filed an incorrect tax return to file amended returns to correct errors or omissions in
for a prior period. prior filings. It is equally clear that tax practitioners have
Treasury Department Circular 230 provides that when an ethical duty to discuss prior non-compliance with their
a tax practitioner learns that a client has not complied clients by explaining the potential consequences of the
with the tax laws, or has made an error or omission in a non-compliance and the various ways in which it can be
previously submitted document, the practitioner must addressed. This requires practitioners to educate them-
notify the client of the non-compliance. Further, the selves on the laws regarding amended returns, including
15
practitioner must discuss the potential consequences of QARs and voluntary disclosures, and to fully understand
non-compliance with the client. Essentially, the practi- why a voluntary disclosure may be preferred to a QAR,
tioner is required to address the non-compliance directly and vice versa.
with the client and explain any potential consequences so As explained above, a QAR does not provide any protec-
that the client can make an educated decision on how to tion for taxpayers whose prior non-compliance involved
proceed. In the course of this discussion, the practitioner fraud. In such cases, only a voluntary disclosure can help
should explain the rules concerning amended returns and limit civil fraud penalties and protect against potential
the available options. criminal prosecution. The main indicator of fraud is
The AICPA Statement of Standards for Tax Services whether the taxpayer “willfully” failed to file a return or
similarly provides that an accountant who learns of an filed an incorrect return. Willfulness is defined as an inten-
error in a previously-filed return, or that a taxpayer failed tional violation of a known legal duty and the IRS has
18
to file a return, must advise the taxpayer of the error, the listed a non-exclusive list of factors, or badges of fraud, that
potential consequences of the prior non-compliance, can indicate willfulness in any given case. When advis-
19
and recommend that measures be taken to address the ing a taxpayer on issues relating to prior non-compliance,
error. The AICPA Standards specifically state that it is the first and most important analysis that a practitioner
16
the taxpayer’s responsibility to decide whether to correct must perform is to consider whether the taxpayer’s prior
the error and further explain that the taxpayer may not be conduct involved any badges of fraud, and the risk that
legally required to do so. However, the AICPA Standards such conduct could be considered willful. Without a thor-
also direct the accountant to consider withdrawing from ough examination of these factors, a practitioner cannot
representing the taxpayer if the taxpayer refuses to correct competently and ethically advise a taxpayer concerning
the error and the accountant believes that this decision his or her non-compliance in prior periods.

ENDNOTES
1 E. Badaracco, Sr., SCt, 84-1 ustc ¶9150, 464 US the filing deadline, the second return is not an 13 Memorandum from Kirsten Weilobob (Nov. 20,
386, 104 SCt 756. “amended” return, but rather, is treated as an 2018), Control Number LB&i-1118-014.
2 References are to the internal Revenue Code of original return that supersedes the first-filed 14 As of the publication of this column, the Form
1986 (as amended) (the “iRC”). return. See Haggar Co. v. Helvering, SCt, 40-1 ustc 14457 has not been publically released.
3 E.g., Colvin, CA-5, 122 FedAppx 788 (2005). ¶9151, 308 US 389, 60 SCt 337; iRS CCA 200645019 15 Circular 230, 10.21.
Section 6213(g)(1) of the Code does reference (2006). 16 AiCPA Statements on Standards for tax Services
an amended return when it provides that the 7 Reg. §1.6664-2(c)(2). No 6: Knowledge of error: Return Preparation
definition of a “return” includes any return or 8 Reg. §1.6664-2(c)(3). See also, e.g., D.J. Planty, 114 and Administrative Proceedings.
amendment thereof. tCM 620, Dec. 61,085(M), tC Memo. 2017-240. 17 Id.
4 Reg. §301.6211-1(a). 9 Reg. §1.6664-2(c)(2). 18 E.g., P. Pomponio, SCt, 76-2 ustc ¶9695, 429 US
5 Reg. §301.6402-3(a). 10 G. Gaskin, 115 tCM 1507, Dec. 61,199(M), tC Memo. 10, 97 SCt 22.
6 When a taxpayer submits a tax return before 2018-89 (2018). 19 Part 25, Chapter 1, Section 6 (Civil Fraud) (“iRM
the filing deadline, but then corrects the tax 11 Code Sec. 6663. 25.1.6”).
return by submitting a second return before 12 iRM 9.5.11.9 (Dec. 2, 2009).

22 JOURNAL OF TAX PRACTICE & PROCEDURE FEBRUARY–MARCH 2019