Accuracy-Related Penalty & Qualified Amended Return

Accuracy-Related Penalty & Qualified Amended Return

Accuracy-Related Penalty & Qualified Amended Return

In the recent tax court case of Lambrecht, the Tax Court provided a detailed opinion regarding accuracy-related penalties in conjunction with qualified amended returns. In general, the Qualified Amended Return (QAR) is when a Taxpayer files an amended return in order to report income missed in the original return — but can avoid accuracy-related penalties because the return qualifies as a QAR. In this particular case, the court disagreed with the Taxpayers’ position regarding the application of a Qualified Amended Return in relation to a John Doe Summons issued on a foreign financial institution. We will refer to different excerpts from the tax court opinion below:

Summary of the Court Procedure

      • “In 2010 Ps filed amended returns for 2006 and 2007 on which they reported the previously omitted income. Upon examination of Ps’ 2006 and 2007 returns, R determined an accuracy-related penalty under I.R.C. § 6662 against Ps for each year on the basis of the tax attributable to the income omitted from the original returns, and issued to Ps a notice of deficiency.

      • Ps timely filed a petition to challenge the penalty determinations in the notice of deficiency, arguing (1) that the IRS failed to comply with I.R.C. § 6751(b)(1) requiring written supervisory approval of penalties, (2) that their amended returns for 2006 and 2007 are “qualified amended returns” within the meaning of Treas. Reg. § 1.6664-2(c)(3) precluding penalty liability, and (3) that assessment of the accuracy-related penalties for 2006 and 2007 is barred by the statute of limitations under I.R.C. § 6501.”

The Court Held the Returns were Not Qualified

      • The amended returns are not “qualified amended returns” under Treas. Reg. § 1.6664-2(c)(3)(i)(D) because they were filed after the service of a John Doe summons.

John Doe Summons

In Lamprecht, the John Doe Summons was the key issue involving the QAR:

Issuance of the Summons

      • The 2008 John Doe summons proceeding The Department of Justice (“DOJ”) filed an “Ex Parte Petition for Leave to Serve John Doe Summons”6 in the U.S. District Court for the Southern District of Florida, styled as “In the Matter of the Tax Liabilities of: John Does”, No. 08-21864 (June 30, 2008). The petition requested authorization to serve a John Doe summons on UBS seeking information regarding the following class of persons:

      • United States taxpayers, who at any time during the years ended December 31, 2002 through December 31, 2007, had signature or other authority . . . with respect to any financial accounts maintained at, monitored by, or managed through any office in Switzerland of UBS AG or its subsidiaries or affiliates and for whom UBS AG or its subsidiaries or affiliates

          • (1) did not have in its possessions Forms W–9 executed by such United States taxpayers, and

          • (2) had not filed timely and accurate Forms 1099 naming such United States taxpayers and reporting to United States taxing authorities all reportable payments made to such United States taxpayers.

      • Finding that the UBS John Doe summons met the requirements of section 7609(f), the district court authorized its service upon UBS by order dated July 1, 2008. UBS did not participate in this ex parte proceeding (nor did the Swiss government)

Enforcement of Summons

      • The 2009 summons enforcement proceeding On February 19, 2009,7 DOJ filed a petition in District Court for the Southern District of Florida to enforce the UBS John Doe summons, styled as United States v. UBS AG, No. 09-20423. The government of Switzerland joined in the enforcement suit as amicus curiae. The enforcement suit was ultimately resolved through two related out-of-court agreements, both executed August 19, 2009…

Withdrawal of Summons

      • Third, as to the UBS John Doe summons itself, the parties agreed that the IRS would “withdraw with prejudice” the UBS John Doe summons after receiving information concerning bank accounts from UBS pursuant to the treaty request for administrative assistance. However, the parties agreed that “if UBS fails to comply in any material respect with any of its obligations” to produce information, then “the IRS is not obligated to withdraw the UBS Summons”.

      • That is, under this agreement, although the summons enforcement suit would be promptly dismissed, the summons itself would remain pending and potentially enforceable until it was “withdrawn with prejudice” after UBS provided the information. The IRS formally withdrew the UBS John Doe Summons, “with prejudice”, on November 15, 2010. Information produced by UBS in response to the John Doe summons included the Lamprechts’ account information.

Treasury Regulation § 1.6664-2(c)(3): QAR Procedure

In understanding why the court rejected petitioners’ returns as a Qualified Amended Return, it is important to understand the definition of a QAR:

      • (3) Qualified amended return defined –

        • (i) General rule.

          • A qualified amended return is an amended return, or a timely request for an administrative adjustment under section 6227, filed after the due date of the return for the taxable year (determined with regard to extensions of time to file) and before the earliest of –

Treasury Regulation § 1.6664-2(c)(3)(D) – Summons

      • (D)(1) The date on which the IRS serves a summons described in section 7609(f) relating to the tax liability of a person, group, or class that includes the taxpayer (or pass-through entity of which the taxpayer is a partner, shareholder, beneficiary, or holder of a residual interest in a REMIC) with respect to an activity for which the taxpayer claimed any tax benefit on the return directly or indirectly.

      • (2) The rule in paragraph (c)(3)(i)(D)(1) of this section applies to any return on which the taxpayer claimed a direct or indirect tax benefit from the type of activity that is the subject of the summons, regardless of whether the summons seeks the production of information for the taxable period covered by such return

Regulation Example 4

      • The facts are the same as in Example 3 except that, instead of contacting P concerning an examination under section 6707(a), in December 2004, the IRS served P with a John Doe summons described in section 7609(f) relating to the tax liability of participants in the type of transaction for which X claimed tax benefits on its return. X cannot file a qualified amended return after the John Doe summons has been served regardless of when, or whether, the transaction becomes a listed transaction.

Amended Returns Filed After UBS Gave Information to the United States

      • In December 2010—after UBS had given its information to the IRS and the John Doe summons had been withdrawn—the Lamprechts filed amended federal income tax returns for the 2006 and 2007 years, which were prepared by a paid preparer. On the amended returns, the Lamprechts reported their previously unreported income.

IRS’ Position on the QAR

      • The Commissioner contends that the amended returns were not “qualified amended returns” because they were filed after the issuance of the UBS John Doe summons.19 He relies for this contention on Treasury Regulation section 1.6664-2(c)(3)(i), which defines a “qualified amended return” thus:

      • A qualified amended return is an amended return . . . filed after the due date of the return for the taxable year (determined with regard to extensions of time to file) and before the earliest of– . . . . (D)(1) The date on which the IRS serves a summons described in section 7609(f) [i.e., a John Doe summons] relating to the tax liability of a person, group, or class that includes the taxpayer . . . with respect to an activity for which the taxpayer claimed any tax benefit on the return directly or indirectly.

      • (2) The rule in paragraph (c)(3)(i)(D)(1) of this section applies to any return on which the taxpayer claimed a direct or indirect tax benefit from the type of activity that is the subject of the summons, regardless of whether the summons seeks the production of information for the taxable period covered by such return . . . .

Court’s Ruling on Qualified Amended Return 

      • Because the Lamprechts were members of the class of persons targeted by the UBS John Doe summons, claimed a tax benefit either directly or indirectly with respect to the activity identified in the UBS John Doe summons, and did not file their amended returns before the UBS John Doe summons was served, their amended returns for 2006 and 2007 are not “qualified amended returns”; and therefore, the reporting on those amended returns of the originally omitted income and the resulting additional tax does not result in that additional tax being included in the Lamprechts’ “amount shown as the tax” on their returns, for purposes of Treasury Regulation section 1.6664-2(c)(2) and section 6662 of the Code. Accordingly, the Lamprechts substantially understated their income tax for 2006 and 2007 and are liable for section 6662 accuracy-related penalties. See § 6662(a), (d).

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