There has been quite a bit of talk about the IRS budget increase and its plans to hire an army of IRS agents. Given this news, those who have filed incorrect tax returns may be wondering if they should go back and file amended tax returns.
This often depends on whether the time period for the IRS to audit the returns is still open or has lapsed and other circumstances. The qualified amended return rules also have to be considered. These rules allow taxpayers to avoid penalties in some situations by voluntarily submitting corrected returns.
The recenet Lamprecht v. Commissioner, T.C. Memo. 2022-91, provides an opportunity to consdier these rules. The taxpayers in this case submitted what they thought was a qualified amended return only to find out that it was not qualified.
Facts & Procedural History
The taxpayers were citizens of Switzerland. They had green cards that allowed them to live and work in the U.S. They lived in California.
The taxpayer-husband received sizeable commissions and failed to report them on the couple’s 2006 and 2007 tax returns. The commissions for both years totaled nearly $6 million.
In 2008, the IRS issued a “John Doe” Summons to UBS for U.S. persons and residents who had Swiss bank accounts. The summons was issued to UBS and not to the taxpayers. The summons did not name the taxpayers, but apparently, the taxpayers were within the class of persons whose information was the subject of the summons. The IRS eventually negotiated an agreement with UBS in 2009, and withdrew the summons in 2010.
After the summons was withdrawn, the taxpayers filed amended returns for 2006 and 2007 to report the then unreported commission income. They paid the tax due and filed FBAR information returns as well.
The IRS audited the tax returns. In 2013 and 2014, the IRS agent obtained manager approval to open an audit of the income tax returns just to assess accuracy-related penalties. The penalties were the subject of the tax litigation. The taxpayers made several arguments as to why penalties should not be imposed, including the argument that the amended return was a “qualified amended return” that precluded imposing penalties.
They filed amended returns
The “Qualified Amended Return”
The “qualified amended return” is a tax return filed after the due date of the tax return that is filed to correct an understatement of tax on the original tax return. This can be an amended return (or, for certain partnerships, a partnership adjustment request).
The qualified amended return differs from a “superseded return.” A superseded return is very similar to a qualified amended return, but the superseded return is filed prior to the due date for the original tax return. For example, if the tax return is due in April of 2025 and the taxpayer filed an original tax return early in March of 2025, they can file a superseded return anytime prior to the April 2025 due date. The superseded return replaces the prior return and the prior original tax return has no effect. The original tax return is completely disregarded. This is true even if the original tax return was fraudulent. So the superseded return can even avoid the higher civil fraud penalty.
Once the due date for the original tax return passes, the amended return can only be a qualified amended return. Qualified amended returns have additional rules that apply. We’ll address some of these rules next. For now, suffice it to say that if the tax return is a “qualified amended return,” the accuracy-related penalties are computed using the amounts reported on the amended return, not the original return.
So if the amended return is correct, there will be no accuracy-related penalty–as there is no understatement of income tax on the amended return. This is the result as the accuracy-related penalty is computed by applying a percentage to the understatement of tax on the tax return.
Nuances of Qualified Amended Returns
These rules for “qualified amended returns” are set out in Regulation § 1.6664-2.
These rules start by saying that a qualified amended return cannot correct a fraudulent position on an original return. As noted above, this differs from the “superseded tax return.”
The regulations go on to provide timing rules. Specifically, the regulations say that an amended return is not a qualified amended return if it is filed after the date the taxpayer is first contacted by the IRS concerning any examination (including a criminal investigation) with respect to the return. This is the rule that many people think about when considering qualified amended returns.
The regulations also include a similar rule for IRS summonses. The IRS summons is a written request by the IRS that is issued to the taxpayer or a third party to obtain information. There are separate requirements for IRS summonses. The IRS Summons is a step above the typical request for records that IRS auditors make during the course of the audit. They are usually issued when the taxpayer fails to respond to the IRS’s informal written requests for records (i.e., the IRS issues an Information Document Request or IDR first).
When the IRS issues a summons, the rules say that an amended return is not qualified if it is filed after the date on which the IRS serves the summons. The summons does not have to be issued to the taxpayer. It can be issued to a third party, such as a bank, as in this case. The IRS summons just has to relate to the tax liability of a person, group, or class that includes the taxpayer. If it does relate to the taxpayer, an amended return is not qualified even if the IRS summons is issued to a third party and the taxpayer is not aware that the IRS issued the summons. This means that the IRS can assess accuracy-related penalties.
After the IRS Summons is Closed
That brings us back to this case. The IRS issued a John Doe summons to UBS. The summons was eventually withdrawn by the IRS. The taxpayer’s amended tax returns were filed after the summons was withdrawn. One might think that the withdrawn summons reset the clock for the time for filing an amended return and having it count as a qualified amended return.
The court did not reach that conculsion. The court concluded that the amended returns were not qualified given that the IRS had previously issued a summons. This is consistent with the language in the regulations. The language makes it clear that an amended return is not qualified after the IRS summons is issued. The language does not go on to say that the qualified period reopens once the summons is complied with or, as in this case, is withdrawn. Once the IRS summons is issued, it is too late to file a qualified amended return.
Those wanting to correct tax returns need to do so timely. Ideally, this can be done before the due date of the return by filing a superseded tax return. If that is not possible, the amended return should be submitted prior to the time the IRS contacts the taxpayer. If the IRS has issued a summons, it may be too late to file a qualified amended return to avoid the accuracy-related penalty. This is true even if the taxpayer complies with the IRS summons and it is closed or the IRS withdraws the IRS summons. Once the IRS summons is issued, it is too late to avoid the accuracy-related penalty by filing a corrected return.