Page 2 - Filing Amended and Current Returns in Cases of Past Noncompliance: How Not to Make Matters Worse

fit. Of particular interest in this respect is a qualified amend- ed return. A qualified amended return is an amended return that corrects an error in a previously filed return prior to the taxpayer being contacted by the IRS regarding the return [Treasury Regulations section 1.6664-2(c)(3)]. The effect of a qualified amended return is to eliminate the accuracy penalty under IRC section 6662 on the amount shown as addi- tional tax on the qualified amended return [Treasury Regulations section 1.6664-2(c)(2)].
A qualified amended return, however, does not prevent the IRS from assessing fraud penalties [Treasury Regulations section 1.6664- 2(c)(2)]. In Badaracco v. Comm’r [464 U.S. 386 (1984)], the Supreme Court considered the impact of filing an amended return correcting a previously filed fraudulent return, specifically on the application of the unlimited statute of limitations for assessment of tax in the case of fraud under IRC section 6501(c). The court ruled that the statute of limitations is not reduced: “In short, once a fraudulent return has been filed, the case remains one ‘of a false or fraudulent return,’ regardless of the taxpayer’s later revised con- duct, for purposes of criminal prosecution and civil fraud liability .... It likewise should remain such a case for purposes of the unlim- ited assessment period specified by section 6501(c)(1)” (Badaracco at 394). Accordingly, the filing of an amended return does not cure a prior fraudulent return; the IRS has an unlimited civil statute of limitations to assess taxes and fraud penalties, and the tax- payer can be criminally prosecuted.
A taxpayer who has filed a fraudulent return may avoid crimi- nal prosecution and be able to reduce her penalties by making a voluntary disclosure. The Internal Revenue Manual, para. 9.5.11.9, “Voluntary Disclosure Practice,” describes the IRS’s vol- untary disclosure policies and procedures and states that taxpayers can voluntarily disclose both domestic and offshore tax noncom- pliance. Help is available at https://www.irs.gov/uac/How-to-Make- a-Domestic-Voluntary-Disclosure and https://www.irs.gov/uac/2012- Offshore-Voluntary-Disclosure-Program.
What About Returns That Are Currently Due?
A CPA or other tax professional can never advise a client to not file a return that is required to be filed and is current- ly due or to delay a filing. A CPA may, of course, advise on whether the client has a filing obligation in the first place, for example, whether a client is required to file a Form 8931. When a taxpayer is required to file a return, however, a CPA cannot advise the taxpayer to not file or to delay filing. It is important to keep in mind that willful failure to file is a crime— either a misdemeanor under IRC section 7203 or felony tax evasion under section 7201, depending on the circumstances. A CPA or other tax professional who encourages a client not to file could be charged with one of those offenses, or with aiding and abetting the taxpayer.
The question then arises as to how a CPA should advise a client whose tax return for the current year may result in self- incrimination. For example, if a taxpayer is under criminal investigation for not reporting foreign bank accounts, and those accounts would have to be disclosed on an accurate Form 1040 and FBAR, the taxpayer may be incriminating himself by fil- ing the returns. In this situation, however, a CPA cannot advise the client to not file the return. The Supreme Court has long held that the Fifth Amendment privilege against compulsory self-incrimination is not a defense to prosecution for failing to file [Sullivan v. U.S., 274 U.S. 259 (1927)]. A taxpayer may, however, refuse to answer specific questions or disclose spe- cific information if that disclosure would be incriminating [Sullivan at 263; see also Garner v. U.S., 424 U.S. 648, 650 (1976)]. To assert a valid Fifth Amendment privilege against self-incrimination, a taxpayer must claim the privilege on the return as an objection to a specific question [Garner at 665; Sullivan at 263-264; Heligman v. U.S., 407 F.2d 448, 450-451 (8th Cir. 1969)].
When Should an Attorney Be Consulted?
SSTS 6 states that “if a member believes that a taxpayer may face possible exposure to allegations of fraud or other criminal misconduct, the member should advise the taxpayer to consult with an attorney before the taxpayer takes any action” (Explanation, para. 11). An attorney may be able to provide useful advice regard- ing the best method to correct noncompliance and whether and how to file a Fifth Amendment return. When it comes to poten- tial criminal prosecution, it is important to remember that conver- sations with a CPA will not be privileged.
IRC section 7525(a) extends the common law attorney-client privilege to “federally authorized tax practitioners,” which of course includes CPAs. Section 7525, however, only applies in noncriminal tax proceedings before the IRS and in the federal courts when the IRS is a party. Therefore, the privi- lege does not protect against disclosure of communications in criminal investigations or proceedings or against disclosure of information to any regulatory body other than the IRS. Moreover, the IRS’s position is that the IRC section 7525 priv- ilege will not apply in a criminal proceeding even if the communication originated in the context of a civil matter or proceeding (Litigation Bulletin 200017039, https://www. irs.gov/pub/irs-ccbs/glb473.pdf).
The IRS takes all cases of noncompliance very seriously. CPAs should be aware of how to guide their corporate and individual clients through the above processes in the event that they are or become noncompliant, whether through accident or intent. q
Megan L. Brackney, JD, LLM, is a partner at Kostelanetz & Fink LLP, New York, N.Y.
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