When is an Amended Return NOT A Qualified Amended Return?

In a prior blog post (here) I discuss options for correcting mistakes and omissions on tax returns and other IRS filings, including filing a qualified amended tax return ("QAR"). A recent Tax Court opinion, Lamprecht v. Commissioner, T.C. Memo. 2022-91, discusses a taxpayer's attempt to avoid the accuracy-related penalty by filing what the taxpayers hoped were QARs. Unfortunately, the Tax Court decided the amended returns were not QARs and upheld the penalties.

A QAR is defined in Treas. Reg. Section 1.6664-2(c)(3) as an amended return filed after the due date of the original return (determined with regard to extensions) and before:

1. The date the taxpayer is first contacted by the IRS regarding an examination or criminal investigation with respect to the return;
2. In the case of a promoted transaction, the date the tax shelter promoter is first contacted concerning an IRS examination;
3. In the case of a pass-through item, the date the pass-through entity is first contacted by the IRS in connection with an examination of the return to which the pass-through item relates;
4. The date a John Doe summons is served on a third party with respect to an activity of the taxpayer for which the taxpayer directly or indirectly claimed a tax benefit; and
5. The date on which the IRS announces, by revenue ruling, revenue procedure, notice or announcement, to be published in the Internal Revenue Bulletin, a settlement initiative to waive or compromise penalties with respect to a listed transaction.

If the amended return is a QAR, the amount of tax reported on the QAR is treated as if it were reported on the original tax return. Thus, there is no underpayment of tax for purposes of the 20% accuracy-related penalty. However, a taxpayer could be subject to a 75% civil fraud penalty if the tax deficiency corrected on the amended return relates to a fraudulent position on the original return, including unreported income.

In Lamprecht, the taxpayers were citizens of Switzerland who resided in the United States. The taxpayers filed U.S. income tax returns but understated their income for 2006 and 2007 by omitting foreign sourced income which they deposited in their accounts at the Swiss bank, UBS AG. In 2008, the IRS served a John Doe summons to UBS AG seeking the identities of U.S. taxpayers using foreign entities and Swiss bank accounts to avoid reporting income on their U.S. tax returns.

In 2010, the taxpayers amended their 2006 and 2007 tax returns to include the previously omitted foreign income. The IRS examined the amended returns and proposed accuracy-related penalties. The taxpayers challenged the penalties by filing a petition in U.S. Tax Court claiming, among other things, that the amended returns were QARs within the meaning of Treas. Reg. Section 1.6664-2(c)(3).

Not surprisingly, the Tax Court held that the taxpayers' 2006 and 2007 amended returns were not QARs because they were filed after the IRS served the John Doe summons on the Swiss bank. The court has a very good discussion of the requirements for a QAR, and why the taxpayers’ amended returns were not QARs, and I would recommend it to anyone who is interested in filing a QAR.

I also found it interesting that the IRS asserted the fraud penalty in its answer to the taxpayers’ Tax Court petition. The opinion does not discuss the fraud penalty because the IRS ultimately conceded the penalty. In previous blog posts, here and here, I discuss the dangers of filing a Tax Court petition and the IRS increasing a taxpayer’s exposure by asserting a fraud penalty in its answer.

For any questions on this or any other tax-related matters, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.