August 1, 2018 11:00 pm

Fraud Not Undone with Amended Returns

If a taxpayer files a fraudulent tax return, both civil and criminal penalties can result. The civil penalty is 75% of the underpayment attributable to the fraud (Code Sec. 6663). But if a fraud results from omitting income and a taxpayer files an amended return reporting that income, can the fraud penalty be avoided?

That’s what happened in a recent case where a taxpayer omitted more than $400,000 in income in 2008 through 2011. This in turn resulted in an underpayment of tax of more than $100,000. When the taxpayer learned he was under a criminal investigation, he filed amended returns for these years. He admitted the fraud (it was part of his plea deal in the criminal matter) but argued that the fraud penalty should not apply on the civil side because of his voluntary disclosure through the amended returns.

The Tax Court said that the fraud penalty is not avoided by filing amended returns (Gary Gaskin, TC Memo 2018-89). As numerous courts, including the Supreme Court have held, an underpayment due to fraud is not expunged by an amended return so the penalty applies. An underpayment is defined as the amount by which any tax imposed by the Tax Code exceeds the sum of the amount shown by the taxpayer on his return, plus the amounts previously assessed or collected without assessment over the amount of rebates, which include abatements, credits, refunds, and other payments to the taxpayer (Code Sec. 6664).

Tax Glossary

Section 457 plan

Deferred compensation plan set up by a state or local government, or tax-exempt organization, which allows tax-free deferrals of salary.

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