Penalties for Fraudulent or False Statements on Prior Year Tax Returns
Penalty for Fraudulent or False Statements on Prior Tax Returns: One of the biggest problems U.S. taxpayers face is what to do about false or fraudulent information they provided on a previous tax return. When it comes to amending prior tax returns, there are many moving parts to be aware of. And, it is important to get your ducks in a row before making any representation to the Internal Revenue Service.
Some clients want to run to the IRS as fast as they can and resolve the matter quickly. Other clients want to bury their heads in the sand and hope it goes away — and some clients just don’t care and are ready to take the IRS to task if they are audited.
No matter what the decision, the ducks in a row analogy still stands — even if you are only planning to bury your head in the sand (you still have to make sure that you dig a big-enough hole…)
Five major concerns with an inaccurate prior tax return:
- Were the prior taxes filed timely?
- Were the taxes filed under an amnesty program?
- Is there a willful component to the non-compliance?
- Is the taxpayer resurrecting a statute of limitations that may have already expired?
- Will the taxpayer be subject to penalties or criminal investigation?
Let’s take a walk through the different concerns step by step:
Were the Prior Tax Returns Filed Timely?
One of the first considerations is to determine whether or not the prior tax returns were filed timely.
If the prior tax returns were filed timely, that would help to avoid any failure-to-file penalty that could be scrutinized if the return is amended. If the original return was filed late, there may be lingering penalties to consider.
Were the Tax Filed under an Amnesty Program?
If the prior returns were filed under an amnesty program, then there is a bit more concern.
The IRS offers various different amnesty programs. The programs vary depending on the type of noncompliance and whether the taxpayer was willful or non-willful. In addition, if the prior tax returns were filed under an amnesty program they may have already gone through a more detailed review.
Therefore, having to go back and amend or re-amend returns that were previously under an amnesty program may be more scrutinized by the IRS — this is an important consideration in moving forward with resolving inaccurate or false information.
Is there a Willful Component to the Noncompliance?
Not all inaccuracies on a tax return are a big deal. One main component is to determine whether the inaccuracy was willful or not. There is no concrete, bright-line test to evaluate willfulness — it boils down to a totality of the circumstance.
For example, if foreign income is missing from a tax return because it is exempt in the foreign country and the taxpayer wholeheartedly believed it was not reportable in the United States — this would probably meet the non-willfulness test (absent reckless disregard or willful blindness).
On the other hand, if the taxpayer knew the income should have been reported but did not report it, then there is the additional concern of whether the taxpayer acted with willfulness — which could also lead to potential fraud penalties (if the IRS can meet the clear and convincing burden) and/or possibly a referral to the IRS Special Agents for a criminal investigation.
Is the Taxpayer Resurrecting an Expired Statute of Limitations?
When it comes to the enforcement of tax return audits and IRS examinations, they are generally limited to three years — although in some circumstances it is extended to six years. If civil fraud is involved, there is no expiration of the statute. In addition, if a tax return was not filed, the statute of limitations does not begin to run until the tax return is filed.
Although taxpayers are supposed to go back and fix any mistake they are aware of, if there are non-willful mistakes that do not have any significant impact on the tax return — and the statute has already expired — the taxpayer must carefully assess their situation. That is because by filing the amended return, the taxpayer may resurrect an expired statute.
If the return is amended and the taxpayer is audited, the taxpayer may take the position that the statute is only resurrected as to the modification of the return and not the entire tax return — but the IRS will try to relate that issue back to other issues in the return in order to keep the entire return open. Especially if resolving the inaccuracy is for a minimal amount of tax, this is a heavy burden for the taxpayer to bear.
This is one of the reasons that statutes of limitations are created, which is to limit or cut-off the ability of the US government to go back in perpetuity to enforce errors in a tax return — especially when they are minor.
Will the Taxpayer be Subject to Penalties or Criminal Investigation?
This is also another major concern. By amending the return, the taxpayer may be opening themselves up to a potential large penalty or criminal investigation — when they may not presently be on the IRS’s radar.
In other words, should the taxpayer let sleeping dogs lie?
In conclusion, before making any modification to a prior tax return that may lead a taxpayer into a criminal investigation or potentially violate their freedom, they must assess all facts and circumstances carefully in light of the potential outcome. They should speak with experienced counsel before reaching out to the IRS.
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