The Internal Revenue Service (IRS) frequently enforces accuracy-related penalties against taxpayers who file incorrect tax returns. These penalties can be as much as 20% of the underpayment of tax due to improper reporting positions. While taxpayers can potentially avoid these penalties by being proactive and filing an amended return, a recent case, Lamprecht v. Commissioner, demonstrates that not all amended returns qualify for penalty protection under the qualified amended return procedures.
The accuracy-related penalties outlined in section 6662 of the IRS code are aimed at taxpayers who make errors on their tax returns due to negligence or disregard of rules or regulations. These penalties also apply to substantial understatements of tax. Negligence is defined as a failure to make a reasonable attempt to comply with tax laws, while disregard for rules or regulations is characterized by careless, reckless, or intentional actions. The substantial understatement penalty is based on computational factors, such as the amount of understatement exceeding a certain threshold.
Taxpayers may avoid accuracy-related penalties by demonstrating reasonable cause, such as relying on a tax professional, or by correcting errors through a qualified amended return. A qualified amended return is one that is filed in a timely manner and is not fraudulent. An amended return must be filed before the IRS initiates a civil or criminal investigation, serves a John Doe summons, or announces a settlement initiative related to a listed transaction in which the taxpayer participated.
In the Lamprecht case, the taxpayers, Swiss citizens residing in the United States, failed to report income from accounts held at a Swiss bank. After the IRS served a John Doe summons on the bank, requesting information about U.S. persons with foreign accounts, the taxpayers filed amended returns to report the omitted income and paid the back taxes owed. However, the IRS still issued a Notice of Deficiency, alleging accuracy-related penalties. The Tax Court ruled against the taxpayers, stating that their amended returns did not qualify for penalty protection.
The D.C. Circuit Court of Appeals upheld the Tax Court’s decision, finding that the Lamprechts’ amended returns were not qualified because they were filed after the IRS had initiated a John Doe summons related to taxpayers who had underreported income using UBS accounts. Despite the taxpayers’ efforts to correct their underreporting through amended returns, the court determined that they were still liable for accuracy-related penalties. This case highlights the importance of understanding the requirements for qualifying amended returns to avoid penalties for tax reporting errors.
Ultimately, taxpayers should be aware of the potential consequences of filing incorrect tax returns and the availability of options like filing qualified amended returns to correct errors and potentially avoid accuracy-related penalties. Seeking guidance from tax professionals and staying informed about IRS regulations can help taxpayers navigate the complexities of tax compliance and mitigate risks of incurring penalties for incorrect reporting.