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> Tax year 2007. Tax return filed 9/13/10. Amended tax return filed 6/22/12. No new tax was assessed as a result of the amended tax return on 6/22/12. Does the amended return now trigger a new filing date for purposes of the 2 year rule? Also, if there is no new tax but the amendment was filed less than 2 years ago, is the tax debt still assessable under 507(a)(8)(A)(iii)?
Zellerbach Paper Co. v. Helvering, 293 U.S. 172 (1934) is an oft cited case for the proposition that "even where an amended return is accepted, the original return is the operative return for the periods of limitations on assessment; the amended return is considered a mere supplement" (
http://www.law.cornell.edu/supremecourt/text/293/183) (However note that the second return of Zellerback was made to comply with a provision of the law requiring a return to be filed base upon a change in tax rate -- thus this was a pure, 100% compliance case with no hint of any fraud).
Conversely, in Badaracco v. Commissioner, 464 U.S. 386 (1984), the Supreme Court Held that "the filing of anonfraudulent amended return after a fraudulent original return had been filed does not start the running of the three-year statute of limitations period on assessment; and therefore -- a tax may be assessed at any time.-- (emphasis) (
http://www.law.cornell.edu/supremecourt/text/464/386)
Note also that a substitute for return (SFR) under IRC 6020(b) is not a return (Bergstrom v. United States, 949 F.2d 341 (10th Cir. 1991). Further, under IRS policy this is explained in detail how the SFR mechanism works (at least in their estimation):
Amended return examples: (
http://www.irs.gov/pub/irs-wd/1998-024.pdf)
CC-2006-002 (
http://www.irs.gov/pub/irs-ccdm/cc-2006-002.pdf )
CC-2010-016 (
http://www.irs.gov/pub/irs-ccdm/cc_2010_016.pdf)
Requirement of Nonfraudulent Return: 11 U.S.C. 523(a)(1)(c)
No Willful Evasion: 11 U.S.C. 523(a)(1)(c)
The test under Beard v. Commissioner, 82 T.C. 766, 777-778 (1984), affirmed 793 F.2d 139 (6th Cir. 1986) includes an honesty factor that "represent an honest and reasonable attempt to satisfy the requirements of the tax law." (much softer standard than "evasion" or "fraud")
Note from a reading of the above IRS background info, that when a first tax return is filed late its treatment is given more scrutiny.
Your facts and timing do raise some concerns.
(1) Your timing suggests a significant chance that the IRS may have filed an SFR before the taxpayer was able to get the first return in. SFR's have an enhanced probability of being generated between 1-2 years after no return is filed. Your tax year 2007 return would have been Due April 2008, and for some reason the taxpayer filed an amended return 2 years and 2 months later. Was this triggered by an SFR?
"Heartbreak of SFR" can be illustrated by a self-employed taxpayer that typically takes in $100k gross income (& 1099's) and that may have $70k in business expenses to net an annual income of $30k. If the taxpayer fails to file, the IRS assesses him, by SFR, a $100k net income and no business deductions, resulting in, say $30k tax.
According to the background materials above if the taxpayer files a first return showing $200k in income and $70k in expenses, a net income of $130k and tax of say $40k, the $10k excess of the SFR amount is "new", it is a "return" for the excess amount over the threshold, and may be subsequently discharged (if the 3y/2y/240d limits are met).
However, and more likely, if the taxpayer files a first return showing $100k in income and $70k in expenses, a net income of $30k and tax of say $3k, the $3k cannot be discharged. It is almost as if the government set themselves a $30k threshold amount below which the taxpayer cannot discharge. Subsequent tax returns that show less than $100k net income are simply displaced by the SFR that IRS prepared.
(2) What was the reason for the #2 late filed return if it did not change the gross amount of the tax liability? Under IRS rules, if the first return was fraudulent, the second return doesn't "cure" it for criminal tax evasion purposes. Further, and as per Badaracco, above, the period for assessment does not even start to run as to the assessment, even where 3 years passed as to a second, nonfraudulent return, much less as to a first nonfraudulent return. Further, the "honest and reasonable attempt to satisfy the requirements of the tax law." standard of Beard seems to set an easier task for the first return to be attacked as simply "not honest and/or not reasonable" and in addition the taxpayer has graciously supplied a second late filed return to enable further analysis, focus, and suspicion to be visited on the first late filed return.
Conclusion
Based on the fact you have related, you may want to do two things:
(1) Check the tax transcript to see if the government filed an SFR and for how much income and resulting in how much tax. If the amount of income and tax for the SFR is greater than that filed in the first and second late returns, the tax will not be dischargeable.
(2) If no SFR was filed by the government, you should look at the transcript and compare it to both returns and get very good answers to questions as to (a) why was the first return late, and (b) why, ESPECIALLY if there was no change in the tax owed, was a second late return filed after the first late return. The answers to (a) and (b) will give an idea on whether or not a charge of fraud could be overcome. The focus should be predominantly on the first late filed return. However, the second late filed return may shed unwanted light onto the honesty of the first late filed return. The focus is on the first late filed return, but both are equally important in determining honesty of the first late filed return.
If IRS even merely alleges "lack of honesty" under Beard, the stage will be set for an adversary proceeding (assuming the IRS is awake).
To protect yourself before you file, you may want to develop the bases and points for nonfraudulent first and second late filed returns, as well as documenting the investigation in your attorney client fee letter with warnings that the taxes may not be dischargeable.
To me, based upon my reading of the materials, the late filed nature of a first return puts concerns relating to 507(a)(8)(A)(iii) / 523 (a)(1)(B) / 523 (a)(1)(C) in common, with the honesty of the first filed late return being critical to all these provisions.
Curt Harrington
Certified Tax Specialist -- State Bar of California Board of Legal Specialization (J.D.; LL.M.-Tax)
Electrical(M.S.E.E.)-Chemical(M.S.Ch.E.)(B.S. Chemistry)-Mechanical Patent (Intellectual Property) Attorney & MBA (562) 594-9784
http://patentax.com
curt@patentax.com
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