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The Stain of Fraud and Amended Returns

Posted on Oct. 5, 2022

What happens when a taxpayer has filed an original return that fraudulently omits income but then the taxpayer files an amended return that attempts to undo the fraud by disclosing the income? In preparing for an upcoming presentation on qualified amended returns I ran across Gaskin v Commissioner, a 2018 case that Bryan Camp blogged at Tax Prof but one I originally missed.

Most tax procedure folks are familiar with the Badaracco case, where the Supreme Court, disagreeing with the Tax Court, held that a taxpayer who submits a fraudulent return does not undo the unlimited statute of limitations (SOL) created as a result of the fraud by later filing a non-fraudulent amended return. Badaracco had argued that the amended return restarted the SOL on assessment, essentially undoing the unlimited SOL that exists when there is fraud on the original return.

Gaskin was not looking for relief from an SOL issue but wanted to avoid steep civil fraud penalties. Gaskin had been under criminal investigation since 2012 relating to fraudulent returns he filed for the years 2008 through 2011. In 2015, he pled guilty to tax evasion under I presume Section IRC 7201 (the opinion does not specify). Prior to the guilty plea, he filed amended returns that included over $400,000 of income he had not included on his earlier returns that inspired the investigation and eventual guilty plea.

After the filing of the amended returns, the IRS assessed the tax but also issued a notice of deficiency that included a 75% civil fraud penalty on the difference between the tax as originally reported on the fraudulent returns and the tax reflected on the amended returns.

Gaskin felt the IRS approach was inconsistent, claiming “that the comparatively modest tax adjustments shown in the notice of deficiency were not attributable to his fraud but to his honest mistakes.”

He continued:

From his perspective the notice of deficiency makes tax adjustments by comparing Mr. Gaskin’s correct tax liabilities with the amounts reported on his amended, nonfraudulent returns. He observes what he considers to be an inconsistency in that the fraud penalties are computed by comparing Mr. Gaskin’s correct tax liabilities with the amounts shown on his original, fraudulent returns. Because in his view the notice of deficiency is predicated on the nonfraudulent returns, he reasons that the fraud penalties should not apply.

Of course, the IRS only needed to base its notice of deficiency on the amended return because the taxpayer granted the IRS the right to make the additional assessment of tax by filing the amended return. In addition, when the IRS obtains a conviction for tax evasion under Section 7201, case law provides that the conviction under Section 7201 necessarily dictates a civil liability for fraud under the principle of collateral estoppel. See Keith’s discussion in Collateral Estoppel in Civil Tax Case Following Conviction of Tax Evasion

In finding for the IRS and that the amended return did not prevent applying the fraud penalty, the Tax Court noted that the posture of the case differed from Badaracco, but involved the same principle:In Brown v. Commissioner, T.C. Memo. 1996-416, 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. (emphasis added)


There may be reasons to file an amended return when an original return reflects errors.  If an amended return is a “qualified amended return” (QAR) it can effectively eliminate the accuracy-related penalty under Section 6662 on the amount shown as additional tax on the QAR. The QAR regime does not undo the Section 6663 fraud penalty, nor can it overcome the principle of collateral estoppel. In addition, regulations and a few cases tease out whether an amended return qualifies as a QAR, and there are some nuances that practitioners should understand.

Of course, even though an amended return cannot undo the fraud, a superseding return can.  A superseded return is one that is filed after the originally filed return but submitted before the due date, including extensions, assuming an extension was properly filed. We have discussed superseding returns many times; e.g., see Nancy Rossner’s guest post This Tax Season May Create Many Superseding Returns.

We address superseding returns and QARs in Chapters 4 and 7B in Saltzman and Book IRS Practice and Procedure.  For those who want a deeper dive, I will also be discussing how the regulations define what qualifies as a QAR and some recent developments in an upcoming CPE sponsored by my friends at Western CPE.

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