Original Return Amounts, Rather Than Those on Amended Return, Used to Compute Fraud Penalty

In the case of Gaskin v. Commissioner, TC Memo 2018-89, a taxpayer was fighting the imposition of the fraud penalty by the IRS on its assessment of taxes.  The taxpayer admitted that he had originally filed a fraudulent return that lead to an IRS criminal investigation, indictment and plea agreement.  However, he had filed amended returns during that process that reported virtually all the income he had fraudulently omitted—but the still computed the 75% penalty under IRC §6663 based on amounts reported on the originally filed returns and not based on the amended returns he later filed.

IRC §6663 provides the following:

(a) Imposition of penalty

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

For most penalties, a taxpayer who files what is referred to by Reg. §1.6664-2(c)(3) as a “qualified amended return”, is allowed to substitute the numbers on that return for the numbers on the originally filed return, thus reducing the penalties the IRS may impose.

The general rule for filing a qualified amended return are found at Reg. §1.6664-2(c)(3)(i) which provides:

(3) Qualified amended return defined

(i) 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;


(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.

However, Reg. §1.6664-2(b) provides that such relief does not apply to any fraudulent position claimed on the original return.

The Tax Court notes that courts have upheld this rule that denies relief to a taxpayer who amends what was initially a fraudulent return:

Courts at every level have held that a taxpayer who filed a fraudulent return cannot avoid the fraud penalty by filing an amended return. In Badaracco v. Commissioner, 464 U.S. 386, 394 (1984), the U.S. Supreme Court held that “a taxpayer who submits a fraudulent return does not purge the fraud by subsequent voluntary disclosure; the fraud was committed, and the offense completed, when the original return was prepared and filed.” In Badaracco the taxpayer argued that an amended return restarted the period of limitations for that year. While the facts in this case differ, the same principle applies. In Brown v. Commissioner, T.C. Memo. 1996-416, 72 T.C.M. (CCH) 620 (1996), we held that a taxpayer was liable for a fraud penalty even after he filed an amended return. The subsequent filing of an amended return after an audit had begun did not purge the original fraudulent filing or fraudulent intent.

The Tax Court then goes on to note that Mr. Gaskin had conceded, as part of his plea agreement, to filing a fraudulent return:

In his plea agreement Mr. Gaskin admitted to filing fraudulent returns. He agreed that from 2008 to 2011 he underpaid his taxes by over $100,000 and that the underpayment for each year was due to fraud. As a result the fraud penalty applies to each of the fraudulent returns. An amended return cannot erase the fraud he committed.