On our Resources page, I have written firmly concerning a taxpayer’s obligation to file a tax return. The question of whether you have an obligation to file a tax return (when you are required to do so) is nonnegotiable. If you have a filing requirement, it is a crime to disregard it. However, whether you have a legal duty to amend a filed tax return, after discovery of an error or admission, is it different question. You might think the answer is a simple – yes. But it is not quite that simple.
As a tax practitioner, I ALWAYS advise taxpayers to amend their tax returns when an error or omission is discovered. However, ultimately it is the client’s decision. And it appears that the law imposes no affirmative legal duty to amend. The language governing this question can be found in the Federal Regulations:
CFR § 1.451-1 General rule for taxable year of inclusion.
(a) General rule. Gains, profits, and income are to be included in gross income for the taxable year in which they are actually or constructively received by the taxpayer unless includible for a different year in accordance with the taxpayer’s method of accounting…. If a taxpayer ascertains that an item should have been included in gross income in a prior taxable year, he should, if within the period of limitation, file an amended return and pay any additional tax due. Similarly, if a taxpayer ascertains that an item was improperly included in gross income in a prior taxable year, he should, if within the period of limitation, file claim for credit or refund of any overpayment of tax arising therefrom.
“Should” is permissive language, coupled with the fact that the IRS has discretion whether to even accept an amended tax return (or reject it). It is hard to connect a legal duty to do something when the receiver has the discretion to reject it. Federal courts and the Tax Court have both said: none of these provisions (Regs) requires the filing of an amended return.
Now, that said, a taxpayer assumes significant risk if discovered and audited. He or she then subjects themselves to accuracy-related penalties or fraud penalties ranging from 20% of the understatement of tax or 75%. Those penalties should weigh heavily in a client’s risk matrix on whether to file an amended return or not. Again, as a practitioner, I recommend filing an amended return. But a recommended course does not mean it is a legal duty.
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