A Qualified Amended Return: How to Prevent Tax Penalties

How Qualified Amended Returns Can Preempt IRS Penalties

Qualified Amended Return (QAR)

When a taxpayer files an initial tax return and then a subsequently amended return in which the amended return reflects income that was missed in the original return, they may become subject to accuracy-related penalties — but they may be able to avoid these accuracy-related penalties by way of submitting a QAR (Qualified Amended Return). Depending on the specific facts and circumstances surrounding the amended return, it will help determine whether or not the amended return qualifies as a Qualified Amended Return. If the Taxpayer meets the timing requirements and there is no Tax Fraud, then a taxpayer may be able to sidestep significant inaccuracy penalties when submitting the amended return. Taxpayers will oftentimes try to find creative ways to fall within the parameters of the statute and regulation as in the recent case of Lamprecht. Let’s walk through the basics of the Qualified Amended Return.

Imposition of Accuracy-Related Penalties

Accuracy-related penalties are primarily handled under Internal Revenue Code, Section 6662, which provides the following:

• • • • (a) Imposition of penalty

        If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.

Substantial Understatement of Income Tax

Oftentimes, the penalty involves the substantial understatement of income tax. This is defined under Internal Revenue Code, Section 6664(d) as:

• • • Substantial understatement of income tax

      • (1) Substantial understatement

        • (A)In general For purposes of this section, there is a substantial understatement of income tax for any taxable year if the amount of the understatement for the taxable year exceeds the greater of—

          • (i)10 percent of the tax required to be shown on the return for the taxable year, or

          • (ii)$5,000.

26 CFR 1.6664-2

The language of this regulation can be a bit dense, so let’s break it down.

• • • (2) Effect of qualified amended return.

      • The amount shown as the tax by the taxpayer on his return includes an amount shown as additional tax on a qualified amended return (as defined in paragraph (c)(3) of this section), except that such amount is not included if it relates to a fraudulent position on the original return.

What does this mean?

The Qualified Amended Return means that the income from the amended return tax liability is considered to be shown as the amount from the original return — except that it does not apply in instances of Fraud. Stated another way, the amended return is a QAR, then the amount shown as doing owing on the qualified return is as if it was included in the original return – with exceptions for fraudulent positions.

What is a Qualified Amended Return

Qualified amended return is defined under regulation subsection 1.6664-2(3)

(3) Qualified amended return defined –

• • • 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 – 

        • (A) The date the taxpayer is first contacted by the Internal Revenue Service (IRS) concerning any examination (including a criminal investigation) with respect to the return;

        • (B) The date any person is first contacted by the IRS concerning an examination of that person under section 6700 (relating to the penalty for promoting abusive tax shelters) for an activity with respect to which the taxpayer claimed any tax benefit on the return directly or indirectly through the entity, plan or arrangement described in section 6700(a)(1)(A);

        • (C) In the case of a pass-through item (as defined in § 1.6662-4(f)(5)), the date the pass-through entity (as defined in § 1.6662-4(f)(5)) is first contacted by the IRS in connection with an examination of the return to which the pass-through item relates;

        • (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; and

        • (E) The date on which the Commissioner announces by revenue ruling, revenue procedure, notice, or announcement, to be published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter), a settlement initiative to compromise or waive penalties, in whole or in part, with respect to a listed transaction. This rule applies only to a taxpayer who participated in the listed transaction and for the taxable year(s) in which the taxpayer claimed any direct or indirect tax benefits from the listed transaction. The Commissioner may waive the requirements of this paragraph or identify a later date by which a taxpayer who participated in the listed transaction must file a qualified amended return in the published guidance announcing the listed transaction settlement initiative.

For Qualified Amended Returns, Timing is Everything

For taxpayers considering submitting a Qualified Amended Return, timing is everything so taxpayers should be careful before submitting to make sure they meet the timing requirements. It is important to note as well that Taxpayers who are fraudulent then they cannot use a QAR to circumvent VDP (IRS Voluntary Disclosure Program).

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.