John Doe Summons Prevents Qualified Amended Return Defense

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An IRS Summons May Prevent a Qualified Amended Return Defense

An IRS Summons May Prevent a Qualified Amended Return Defense

A Court of Appeals Rules IRS Summons Precludes the Filing of a Qualified Amended Return

The case of Lamprecht is a complex international tax law case that we have written about previously involving under-reporting income and issues involving the reporting of foreign bank accounts. In Lamprecht, U.S. Taxpayers had initially claimed that they did not have any foreign accounts, but they did — and in fact, the accounts were located in UBS — which is one of the IRS ‘bad banks’ in Switzerland. In addition, taxpayers also underreported their income. One of the main issues involving Lamprecht is a procedural glitch, in that the bank where they held their unreported foreign account (UBS) was served a John Doe summons, which included the class of unknown taxpayers who may have failed to report the existence of taxable income from their UBS account. Subsequently, UBS and the United States entered a cooperation agreement — so the enforcement of the John Doe summons was not necessary, and in 2010 the United States formally withdrew the summons in 11/2010.

The issue involving Qualified Amended Returns is the following:

      • If in 2010 (after the United States withdrew the John Doe summons against UBS) when the Lambrechts amended their tax returns for 2006 and 2007 as a QAR (Qualified Amended Return), did the Summons prevent the Taxpayers from claiming a QAR defense against penalties?

The reason this is important is because under the ‘Qualified Amended Return Defense (QAR),’ penalties would be limited. Unfortunately for the Taxpayers, D.C. Appeals ruled in favor of the government, and let’s take a look at what the court ruled:

As provided by the Court Ruling:

The IRS Complied with 26 U.S.C. §6751(b)(1)

      • “The Lamprechts make three arguments related to a statutory requirement that:No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretarymay designate.26 U.S.C. §6751(b)(1).

      • Each argument lacks merit.”

The Lamprechts’ CorrectedReturns Did Not Protect Them from Penalties

      • “IRS regulations preclude penalties for some taxpayers who correct their previously filed tax returns. But the protection does not apply if taxpayers fail to file newreturns before “the IRS serves a summons…relating to the tax liability of a person, group, or class that includes the taxpayer… with respect to an activity for which the taxpayer claimed any tax benefit on the return directly or indirectly.” 26 C.F.R. §1.6664-2(c)(3)(i)(D)(1). Returns that meet those criteria are called “qualified amended returns.”Id. at (c)(3)(cleaned up). Though the Lamprechts filed correctedreturns, they were not “qualified amended returns.”That’s because their corrected returns were filed aftera John Doe Summons sought information on a class of taxpayers who did exactly what the Lamprechts did—use UBS accounts to underreport their taxable income.

      • They make two arguments to the contrary, but neither is persuasive.”

A. The Summons Was Legal

      • “The Lamprechts do not dispute that they were within the “class” covered by the John Doe Summons; instead, they argue that the summons was illegal.According to them,the United States issued the John Doe Summonsonly to extend the relevant statute-of-limitationsperiod,so it was not “issued for a legitimate purpose,”and thusit didn’t prevent them from filing“qualified amended returns.”Lamprecht Br. at 41, 43;see also26 C.F.R. §1.6664-2(c)(3)(i)(D)(1). We can assume without deciding that the Lamprechts introduced enough evidence to show that extending the statute of limitations was one purpose of the John Doe Summons. But the couple hasnot shown that it was the only purpose. In fact, the Lamprechts’ own evidence shows that there was a second purpose.

      • As theyexplain, the IRS “wanted to use the [John Doe]Summons as leverage against Switzerland to ensure that UBS met its obligations under the UBS Settlement Agreement.” See Lamprecht v. Commissionerof Internal Revenue, T.C.Memo 2022-91,2022 WL 3923833, at *17(T.C. Aug. 31, 2022)(quoting theLamprechts).Thereisn’t any dispute among the parties about whether that was a legitimate purpose, and weagree with the tax court that it was.Cf. id. at *18 n.25.That ruins the couple’s claim that the summons was an “attempt to extend the limitations period for assessment, and for that purpose only.”Lamprecht Br. at 46.”

B. The Summons Relatesto a Benefit Claimed on the Lamprechts’ Original Tax Returns

      • “Next, the couplearguesthat the John Doe Summons wasnot issued “with respect to an activity for which the [Lamprechts] claimed any tax benefit on the return directly or indirectly.”26C.F.R.§1.6664-2(c)(3)(i)(D)(1). If that’s right, then the summons does not disqualifytheircorrectedreturns from the category of“qualified amended returns”that protects them from penalties.But (1) there was a “tax benefit” claimed “on the return[s]” originally filed by theLamprechts (2) “with respect to” an activity covered bythe John Doe Summons.Id.First, let’s consider the “tax benefit” claimed “on the return[s].”Id.Eachreturn asked if the couple had “a financial account in a foreign country, such as a bank account.” A131(2006), 199(2007). For 2006, the Lamprechts originally answered:“No.”Id.at131. They did the same for 2007. Id.at 199. As their correctedreturns acknowledge, each nowas a misrepresentation. Id. at165(2006), 232(2007).And eachmisrepresentation “on the return” provided a “tax benefit” to the couplebecause the misrepresentationsallowed the Lamprechts to avoid about $2.5 million in taxes. 26 C.F.R. §1.6664-2(c)(3)(i)(D)(1).

      • Second, the John Doe Summons covered information “with respect to” the tax benefit of those misrepresentations. Id.The summons was issued to secure information about taxpayers who failed to report the existence of UBSbank accounts. Lamprecht, 2022 WL 3923833, at *3. That is exactly what the Lamprechts did.”

Court Ruling

      • “We are unpersuaded by each of the Lamprechts’ arguments. First, the IRS showed in tax court that a supervisor preapproved the Lamprechts’ penalties in writing. Second, the couple did notprotectthemselvesfrom penalties by filing “qualified amended returns.”And third, the statute of limitations does not bar the assessment of those penalties. We affirm the tax court’s decision to award summary judgment to the IRS.”

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.