The recent report from a government watchdog agency called the Government Accountability Office (GAO) shows how well…
Can I Disclose Issues to the IRS After the Tax Return Is Filed? This question is very important for our clients exploring silently disclosing previously unreported income on an amended income tax return.
The general rule is that taxpayers are stuck with a position once they take it on a tax return filed the IRS. However, there is one obscure exception to this rule is the qualified amended return (QAR), which can be a powerful self-help remedy for taxpayers who erroneously omit issues on their income tax returns (or they cannot sleep because the stance they took on their tax return was too aggressive).
Filing a QAR in these situations may allow a taxpayer to avoid penalties stemming from the inaccurate tax return.
First the QAR rule: Disclosures can be made on a qualified amended return. Treas. Reg. § 1.6664-2(c)(2).
Amounts of tax reported on a qualified amended return will be treated as if they had been reported on the original return for purposes of computing the amount of the tax “underpayment,” unless the original return reported a fraudulent position. Treas. Reg. § 1.6664-2(c)(2).
To be “qualified,” the amended return must be filed before: (1) the date the taxpayer is first contacted concerning an IRS examination; (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 concerning an IRS examination; and (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 claimed a tax benefit, and (5) the date on which the Service announces a settlement initiative for a listed transaction. Treas. Reg. § 1.6664-2(c)(3)(i).
If a taxpayer fails to disclose a listed transaction for which a tax benefit is claimed, an amended return will be treated as a “qualified” amended return only if it is filed before: (1) the dates described above for qualified amended returns in general; (2) the date the IRS first contacts a person regarding an examination of that person’s liability for penalties under Code § 6707(a) with respect to the undisclosed listed transaction of the taxpayer; and (3) the date on which the Service requests from a taxpayer’s material advisor (or any person who made a tax statement for the benefit of the taxpayer) the information required to be included in a list under Code Section 6112 relating to a transaction that is the same as, or substantially similar to, the undisclosed listed transaction. Treas. Reg. § 1.6664-2(c)(3)(ii).
The QAR rules, like most things tax, are complex. However, the QAR is a powerful tool to remedy an error on an income tax return and avoid penalties arising from the inaccurate tax return.