Qualified Amended Returns Can Eliminate Accuracy Related Tax Penalty
Improved tax compliance requires taxpayers (and those who ought to be taxpayers) to voluntarily come into compliance. When errors are discovered in a filed return, tax practitioners often pave the road to compliance through assurances that the tax-equivalent of water-boarding is not a typical govern
Penalties Based on "Underpayment" of Tax.Internal Revenue Code (Code) ?? 6662(a) and (b) provide for a 20% penalty on an "underpayment" resulting from negligence, a "substantial understatement of income tax", a substantial valuation misstatement, a substantial overstatement of pension liabilities, or a substantial estate or gift tax valuation overstatement.[i] Code ? 6663 provides for a 75% civil fraud penalty on the portion of any "underpayment" attributable to fraud. For purposes of Code ?? 6662 and 6663, an "underpayment" is defined in Code ? 6664 and the regulations as the difference between the correct amount of tax (determined without regard to payments and credits) and the "amount shown as the tax by the taxpayer on his return" (including amounts previously assessed and credits or refunds received).
Qualified Amended ReturnTreasury Regulation (Treas. Reg.) ?1.6664-2(c)(2) relating to the timely filing of a Qualified Amended Return (QAR). Generally, the QAR Regulations are intended to encourage voluntary compliance by permitting taxpayers to avoid accuracy-related penalties if an amended return is filed before the IRS begins an investigation of the taxpayer or the promoter of a transaction in which the taxpayer participated.
The Civil Fraud Exception.A QAR effectively eliminates accuracy-related penalties, by removing amounts shown on the amended return from the penalty calculation. Significantly, even if timely, an amended return does not qualify as a QAR if the tax deficiencies that are corrected in the amended return relate to a fraudulent position on the original return. Why? Taxpayers should be encouraged to voluntarily amend all returns, even returns that for some reason may be deemed to include fraudulent positions, before the occurrence of any of the events set forth in Treas. Reg. ? 6664-2(c)(3). Historically, the IRS rarely examined amended returns setting forth a deficiency. The IRS is presently conducting examinations of good faith QARs and is aggressively seeking interviews of the taxpayer, the return preparer and others.