Court Finds Frivolous Return Penalty Applies To Trustee

The Center for Taxpayer Rights has another session of its Tax Chat! series, Transforming Tax Administration: Toward an Effective, Trusted, & Inclusive IRS, on Wednesday April 26th at noon EDT.  The topic is the IRS Workforce: Current and Future Challenges. Our guests will be Doreen Greenwald, National Vice President of the National Treasury Employees Union;  Prof. Bob Tobias, American University and former member of the IRS Oversight Board; and Lotta Bjorklund Larsen, social anthropologist, of Exeter Business School.  If you haven’t registered for the series already, you can do so here.

Stanojevich v Commissioner is a precedential Tax Court opinion from early April that considers whether a trustee can be subjected to frivolous return penalties. I suspect that it rises to the level of a TC opinion because the returns in question were submitted on behalf of a grantor trust, which itself has no separate income tax liability.

Stanojevich filed Forms 1041 for four years in his capacity as trustee for Source Financial Trust (SFT) The returns reported interest income of between $40,000 and $58,000. The returns also reported that there were withholdings equal to each year’s interest income and that there was no tax liability. As such, the returns reflected overpayments equal to the amount of the withheld tax.

The returns included as attachments false Forms 1099, and those reflected the purported interest payments. The IRS determined that the Forms 1041 were frivolous for purpose of the $5,000 penalty under Section 6702, and it assessed $5,000 penalties for each of the four years.


I note that the 6702 penalties are assessable penalties found in Title 26, Chapter 68, Subchapter B. The IRS’s assessment authority for penalties is a hot issue. In Farhy v. Commissioner, 160 T.C. No. 6 (April 3, 2023), the Tax Court held that the IRS lacked statutory authority to assess Section 6038(b) penalties against an individual taxpayer for failure to file information returns with respect to foreign corporations. For a somewhat critical discussion of Farhy, see Jack Townsend in Tax Court Holds that IRS Has No Authority to Assess § 6038(b) Penalties for Form 5471 Penalties and my earlier also skeptical take on the issue in Tax Court To Consider IRS Procedure For Imposing Information Reporting Penalties.  We address Farhy and related issues in the upcoming update in Saltzman and Book IRS Practice and Procedure, Chapter 7B, a chapter also currently in process for a rewrite, with Stephen Olsen talking the lead on that important work.

Back to Stanojevich. After the IRS filed a notice of federal tax lien in respect of the penalties, Stanojevich timely requested a CDP hearing, challenging the penalty. After losing at Appeals, he timely petitioned the Tax Court.

The main issue in the case, which is teed up on the government’s summary judgment motion, is penalty liability.  It is not clear why the court allowed the taxpayer a hearing on the merits.  When the IRS assessed the penalty, I would have thought it offered the taxpayer the right to respond to the proposed penalty assessment and to appeal the decision to impose the penalty.  If so, why wouldn’t that “prior opportunity” to go to Appeals shut down a merits determination on the penalty issue?

Congress beefed up the frivolous return penalty in 2006, increasing the cost from $500 to $5,000 per submission. Section 6702 now imposes a penalty when there is a purported return that reflects a position that the IRS has identified as frivolous or is submitted to delay or impede administration of the tax laws. In addition, the statute requires that a ”person files what purports to be a return of a tax imposed by this title but which—

(A) does not contain information on which the substantial correctness of the self-assessment may be judged, or (B) contains information that on its face indicates that the self-assessment is substantially incorrect.”

IRC § 6702(a)(1)(A) & (B)

The opinion has little problem concluding that the conduct trips clauses (A) and (B). As to the first requirement, that the return “does not contain information on which the substantial correctness of the self-assessment may be judged” and “contains information that on its face indicates that the self-assessment is substantially incorrect” the opinion notes that there was no way to tell from the returns” how no tax could be self-assessed on SFT’s reported taxable income and how SFT could be entitled to a refund equal to the amount of its reported taxable income.”

As to the second requirement, Notice 2010-33 identifies “frivolous” for purpose of section 6702 a “claim on an income tax return or purported return an amount of withheld income tax . . . that is obviously false because it . . . is disproportionately high in comparison with the income reported on the return or information on supporting documents filed with the return.”

After dispensing with those issues, the opinion considers whether the penalties apply when the return itself was signed and submitted by the fiduciary and supposedly relates to an entity that has no separate tax liability. The statute requires that a “person files what purports to be a return of a tax imposed by this title.”  As to the absence of liability associated with a grantor trust, the opinion notes that income tax may be imposed on a trust, and that trusts, through their fiduciary, are required to file returns when gross income is greater than $600. This requirement applies regardless of taxable income or tax liability if the trust were to qualify for pass through treatment (I note that the IRS disputed whether the entity was a valid trust but conceded for purposes of the summary judgment motion that it was).

The assessable penalty provisions define person to include certain officers or employees of a corporation, or to certain members or employees of a partnership. The opinion notes that definition is not exclusive. For good measure, Section 7701(a) states that a person “shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.”

Putting it together, the opinion sustains the penalties, and finds that the statute or Code more generally does not prevent the IRS from imposing a penalty for filing a frivolous return that is not a taxpayer’s personal return:

We read nothing in section 6702 that conditions the applicability of section 6702(a) on a person’s filing of his or her personal income tax return. In fact section 6012(b)(4) points to our contrary reading through its mandate that the return of a trust “shall be made by the fiduciary thereof,” or in other words, by its trustee. See also § 7701(a)(6) (defining the term “fiduciary” as a “trustee . . . or any person acting in any fiduciary capacity for any person”).


The opinion reaches a sensible result, but in reading this and the recent Farhy case and other penalty cases for the treatise it strikes me that Congress may wish to take a fresh look at the scattered assortment of civil penalties, as well as the IRS’s process for determining whether a taxpayer has reasonable cause. It has been over three decades since the IRS asked Congress to step in and overhaul the Code’s penalty regime, and since then Congress has taken an ad hoc approach to sanctioning taxpayer and third party conduct. It is time for a fresh look.

Trust Fund Recovery Penalty Case Raising Issues Regarding Deposit and Last Known Address

In Ahmed v. Commissioner, No. 22-10191 (3rd Cir. 2023) the taxpayer appeals from a decision of the Tax Court that an attempted deposit of the amount of his liability was properly categorized as a payment ended his Collection Due Process (CDP) case due to mootness.  On appeal, Mr. Ahmed gets another chance to prove the money he paid to the IRS should not moot his CDP case.

Along the way to its decision, the Third Circuit provide good background on the Trust Fund Recovery Penalty (TFRP), proper addressing of notices, deposit vs. payment and mootness.  Because it has so many procedural issues packed into one case, it provides a good case for a multifaceted procedural discussion.


Mr. Ahmed ran a business which failed to pay over the withheld income and social security taxes from its employees.  The IRS determined that he was a responsible officer who willfully failed to pay over the money the corporation held in trust for the IRS.  It sent Mr. Ahmed a notice setting out his liability and giving him the right to discuss the proposed assessment with Appeals.  He says that he never received the notice.  The court states that the envelope shows the street address as 5B but his CDP request form indicated that he lived at 58.  The court noted other possible problems with the address.

Because he did not receive the notice giving him the right to go to Appeals as part of the TFRP determination process, his case went into the collection stream and eventually led to a CDP notice of federal tax lien filing (NFTL).  When he received his CDP notice, he timely filed.  Appeals sustained the filing of the NFTL resulting in a determination letter from which he filed a Tax Court petition.  The Tax Court partially granted summary judgement to the IRS but remanded the case to Appeals for verification of the mailing of the TFRP notice to his last known address.

While Appeals began its reconsideration of the case, Mr. Ahmed remitted $625,000 to the IRS with the statement “Deposit in the Nature of a Cash Bond Under IRC 6603.”  The accompanying letter also instructed the IRS to treat the remittance as a deposit.  The IRS, however, determined he was ineligible for treatment of the payment as a deposit because a liability under 6672 does not fall within the sections covered by 6603 deposit procedures.  So, the IRS treated the remittance as a payment and the payment mooted the CDP proceeding by satisfying his liability.  It moved for dismissal of the CDP case as moot, the Tax Court dismissed the case for lack of jurisdiction and Mr. Ahmed appealed.

The Third Circuit states that the threshold question it must answer is whether the payment qualifies as a deposit.  It then provides historical background on this issue pointing out that common law initially served as the basis for making this determination.  The Supreme Court recognized tax deposits in Rosenman v. United States, 323 U.S. 658, 662-662 (1945).  At the time of the Rosenman decision the IRC contained no provision regarding deposits versus payment.  Following the Rosenman decision courts began using a facts and circumstances test which the court illustrates through a string citation of six cases decided between 1965 and 2013.  Congress entered this area of the law in 2004 when it enacted 6603.

The court notes, as the IRS had determined, that 6603 does not apply to money remitted to the IRS with respect to a 6672 liability.  Although 6603 does not apply to allow a deposit in this situation, 6672 has its own deposit provision in 6672(c) which allows a taxpayer to post a bond.  Here, Mr. Ahmed was arguably prevented from using the specific provision due to the lack of receipt of the 6672 notice because the IRS mailed it to someplace other than his last known address.  So, the issue turns back to whether the IRS sent a valid notice.  Because the issue of the validity of the notice required by 6672(b) remains unresolved, the court notes that his remittance may have occurred prior to an appropriate assessment in which case the facts and circumstances test could render the remittance a deposit rather than a payment.

The court then notes that if the 6672 notice was sent to his last known address, then he should have used the bond provision of 6672(c) rather than seeking to make a deposit under 6603.  If a valid notice was sent, the Tax Court’s decision was correct, and the payment mooted the CDP case with one possible exception.  The court finds that he may be entitled to request interest abatement under 6404(h).  The court explains the ability of the Tax Court to view his CDP request as also encompassing an interest abatement request and leaves it to the Tax Court to determine whether the request could be construed to cover interest abatement once the remittance issue is resolved.

The court also drops a footnote swatting away Mr. Ahmed’s effort to argue for a refund citing to McLane v. Commissioner, 24 F.4th 316 (2022) and Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006).  In the same footnote it also notes the CDP case involving the NFTL is moot because the IRS released the liens after treating the remittance as a payment.

So, Mr. Ahmed gets a trip back to Appeals where he will argue that the 6672 notice was improperly addressed.  If he fails to convince Appeals, he can make the argument to the Tax Court and if he fails there head back to the Third Circuit.  If he wins on the address issue, the remittance will be changed to a deposit, the IRS will send a new notice if it is still within the assessment period or he will have a complete victory if the statute has run.  In the end the deposit issue is really a sidelight to the issue of proper notice.  Based on the facts presented in the opinion the notice issue will be close if it is based on a typo of “5B” versus “58.” 


We welcome back guest blogger Megan L. Brackney who is a partner in the New York City Office of Kostelanetz.  We also welcome as her co-author first time guest blogger Melina Watson who is an intern at Kostelanetz and a student at Spelman College.  After graduation in May, Melina will return to Kostelanetz as a paralegal and will be attending Columbia Law School in 2025.  Megan would like to thank Prof. Tom Weninger, Jessica L. Jeane, Travis W. Thompson, Jonathan T. Amitrano, and the other members of the Individual and Family Income Tax Committee of the American Bar Association Tax Section who gave her the idea for this post during their excellent presentation, “Combatting Misinformation on Social Media” at the ABA Tax Section meeting in San Diego on February 10, 2023. Les

Given the popularity of TikTok, it is not surprising that there are numerous TikTok videos relating to tax.  Some of these videos contain useful and accurate information for people seeking tax advice, some are obviously not trustworthy, and others fall in between and may seem dependable to a layperson, but not actually provide accurate advice.

At right, Taxes with AJ @vidaincometax accurately warns against shady tax preparers

A woman in a polka dot blouse and long straight hair looks straight at the viewer and speaks into the camera. She is sitting on a leather office chair.

As people rely more on social media sources, such as TikTok, for news and information, and the number of qualified, affordable, and available tax professionals continues to decrease, have we reached a point where reliance on tax advice from TikTok could be reasonable cause?  When I have asked this question, the reaction of my fellow tax practitioners has been, “no way!”  Instead, they say, taxpayers should obtain advice from tax professionals.  This is great advice, in theory, but it is becoming more difficult for taxpayers of limited financial means to find affordable and qualified tax professionals who will provide any better advice than what they can get for free on TikTok. 


TikTok is one of the many social media platforms that have attracted people seeking free financial advice. This tax season, the hashtag “#taxes” has received increased engagement on TikTok, and according to the platform’s analytics has over 500 million views and 44,000 posts. Posters on TikTok range from CPAs and other tax practitioners to scammers, and while there is quality advice available on TikTok, scams, hacks, and “secret techniques” are being posted, promising higher returns or fewer taxes owed, which may appeal to lower income taxpayers and those who cannot consult a credentialed paid tax preparer or expert. The IRS has even included social media tax advice on its “Dirty Dozen” list for 2023, as this Tax Notes (paywall) article from a few weeks ago discusses.

We can see from statistics from the National Taxpayer Advocate that obtaining quality tax return preparation services and advice is a huge problem for lower income taxpayers.  Looking at the statistics related to taxpayers who claim the Earned Income Tax Credit (“EITC”) in 2021, paid return preparers prepared just 53% of those returns, but of those returns, non-credentialed return preparers prepared approximately 58%. see e.g., the NTA 2022 annual report to Congress, at pg. 129. And, in case you wonder whether it matters if a tax return preparer has credentials, i.e., whether a tax authority requires them to have some training and competence, we see that with respect to EITC’s, about 92% of the total amount of dollars in audit adjustments made on 2020 returns occurred on returns prepared by non-credentialed return preparers. see e.g. , the NTA 2022 annual report to Congress, at  pg. 128.

And even if you can afford to pay a credential preparer, good luck finding one.  There is a shortage of tax return preparers creating difficulties for people of all income levels from getting assistance.  Between 2020 and 2022, the Wall Street Journal reports (paywall) that more than 300,000 U.S. accountants and auditors have left their jobs, amounting to a 17% decline. This “exodus” of qualified tax professionals is part of an ongoing and larger economic trend, coupled with fewer people pursuing degrees in accounting.  

The Volunteer Income Tax Assistance (VITA) grant program, a service provided by the IRS, is experiencing shortages in volunteers, especially in rural and low-income communities in which those taxpayers have the greatest need. The number of tax filing assistance programs dropped considerably during the pandemic, and the rate of growth has slowed in recent years. The livelihood of low-income tax return preparation services like VITA is mainly dependent on the number of qualified volunteers to assist with these returns. As NewAmerica discusses, a lack of professionals and volunteers means that taxpayers of all incomes, especially low-income taxpayers, will have limited resources.

Where does this leave someone without the resources or ability to find and hire a credentialed and competent return preparer?  It leads them to do their own research. is full of great resources and information, but it can be difficult to find the answer you are looking for, and, if you have limited time, education, or English language skills, it can be even more challenging.  Many taxpayers will look for answers to question on the internet, and this may take them to TikTok. 

And what do we find when we go there?

First, we actually see legitimate advice.  This poster also provides basic, but also accurate and useful, information about standard deductions, tax brackets, and home mortgage deductions, and some slightly more sophisticated advice on topics like “tax loss harvesting,” i.e., selling some stocks at a loss to offset your gains before ethe end of the tax year. And, the same poster, Eric Powell, also posted a video countering the bad advice (see below) that you can hire your children from birth to get a tax write-off.   

In How to pay less in taxes, understand how the tax code works and work… this poster talks about IRC § 1031 exchanges as if they are a secret, illicit strategy, but the advice is accurate  This post contains a skit about paying a family member for providing childcare to get the credit for child and dependent care. In the skit, the grandmother is actually providing child care, and the son is actually paying her.  The idea is to get a tax benefit and keep the money in their family, which is not a bad idea so long as they comply with the rules.  See IRC § 21; and a summary here in IRS pub 503 on the topic.

But, we also see really bad advice.  This clip was featured during the ABA Tax Section program, “Combatting Misinformation on Social Media.”  In Clothing is not tax-deductible, but UNIFORMS are 🤓 #Taxtiptuesday  the poster correctly states that clothing is usually not deductible, but then goes on to say that if you print your name on your clothing, it becomes a uniform, and it is then a valid deduction. 

The responses to the tax posts could be an article in themselves, but my favorite response here is:  “welcome to your audit.”  In any event, what this poster neglects to mention is that uniform expenses are deductible under IRC § 162(a) if the uniforms are “(1) of a type specifically required as a condition of employment, (2) not adaptable to general use as ordinary clothing, and (3) not so worn.”  Patitz v. Comm’r, T.C. Memo. 2022-99, at *8 (citing Yeomans v. Comm’r, 30 T.C. 757, 767 (1958)).  

In This is how you can legally write-off your travel #taxwriteoff this TikTocker crosses the line on business travel. He explains that business travel expenses are deductible, which may be true depending on the circumstances, but then goes on to claim that as long as you do some work on vacation, you can deduct the cost of basically any travel.  The video begins by stating: “You can take your kids to Disneyland and write that trip off if you do work while you’re at Disneyland!”     The video does not mention, however, that this trip to Disneyland itself must be “reasonable and necessary in the conduct of the taxpayer’s business and directly attributable to it.”  Treas. Reg. § 162-2(a).  And moreover, if a taxpayer is engaging in both business and personal activities when they travel, for the travel costs to be deductible, the regulations provide that “traveling expenses to and from such destination are deductible only if the trip is related primarily to the taxpayer’s trade or business.”  If the trip is “primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination.”

Another TikTocker advises viewers to pay their children “from birth” up to $12,000 per year and deduct it as a business expenses.  Obviously, if the children are not providing services to the business, they cannot be treated as employees.

There are also a lot of videos about the IRC § 179 bonus depreciation for vehicles that way over 6,000 pounds.  This post is typical. In this video, the poster actually does mention that the deduction has to be proportional to the business use of the vehicle, although that is a quick note at the end.

Now that you have a sense of what is out there, we return the question  –  If a taxpayer relies on advice from TikTok that turns out not to be correct, and ends up with an adjustment of their tax liability, can the taxpayers rely on that advice as a reasonable cause defense to accuracy penalties?

The baseline for reasonable cause as a defense to accuracy penalties in IRC § 6662 (and fraud penalties in IRC § 6663) is in Treasury Regulation 1.6664-4(b)(1), which states that this facts and circumstances determination “made on a case-by-case basis.”  [Note that there is a different articulation of reasonable cause for failure to file and failure to pay penalties.  Also, fraud penalties raise other issues that are outside of the scope of this post]. The key factor is “is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.”  The Regulation goes on to say that circumstances that indicate a good faith effort to assess the proper liability include:  “the experience, knowledge, and education of the taxpayer.”  Id.

One of the most effective reasonable cause defenses to accuracy penalties is reliance on a tax professional.  The regulations state that the minimum requirements for this defense are that the taxpayer provided all of the pertinent facts to the advisor, the advice is not based on unreasonable factual or legal assumption, and the taxpayer relies in good faith on the advice.  Treas. Reg. § 1.6664-4(c)(1).  The advice does not have to be in any particular form and can be “any communication. . . provided to (or for the benefit of) the taxpayer and on which the taxpayer relies, directly or indirectly.”  Treas. Reg. § 1.6664-4(c)(2). 

Courts have articulated similar tests for reasonable cause, most notably in Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 98-99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002), in which the Tax Court and Court of Appeals explained that good faith reliance on an independent, competent professional as to the tax treatment of an item may constitute reasonable cause.  Reasonable cause and good faith are present where:  (1) the taxpayer reasonably believes that the professional upon whom the reliance is placed is a competent tax adviser who has sufficient expertise to justify reliance; (2) the taxpayer provides necessary and accurate information to the adviser; and (3) the taxpayer actually relies in good faith on the adviser’s judgment.   See Internal Revenue Manual  Neonatology, 115 T.C. at 99.  Similarly, in United States v. Boyle, 469 U.S. 241 (1985), a case that concerned reliance on a tax advisor to meet a filing deadline, the Supreme Court explained that reliance on a tax advisor establishes reasonable cause where the issue was substantive, and the taxpayer provided all of the information to a competent tax advisor.  As stated in Boyle:

When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice.  Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney.  To require the taxpayer to challenge the attorney, to seek a “second opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.

Id. at 251. 

The obvious problem with trying to fit the TikTok advice into reasonable cause based on reliance on professionals is that the communication is one-directional – the taxpayer receives general advice but has not provided the factual information about their situation to the tax advisor. 

Given the lack of access to tax professionals and the complexity of some Code provisions that impact low income taxpayers, the Neonatology/Boyle iterations of reasonable cause are insufficient for current times.  Instead, the IRS should adopt a more expansive view of reasonable cause that includes information from advisors on social media, along with taxpayer’s own study of the issue. What the IRS and courts should not do is determine that a taxpayer does not have reasonable cause merely because they did not consult a tax professional.  In that regard, the case of Reiff v. Comm’r, T.C. Summ.Op. 2013-40, at *6, is troubling.  There, the Tax Court sustained accuracy penalties, noting that although the taxpayer conducted online research regarding deductions on his self-prepared return, he “did not consult or otherwise seek the advice of a tax professional in preparing their return.”   There is simply no requirement in the Treasury Regulations that a taxpayer consult a tax professional. Of course, in some circumstances, it might be appropriate in the reasonable cause analysis to require a high net worth taxpayer who can afford competent tax advisors to seek professional tax advice, but this requirement should not be imposed without analysis of the taxpayer’s ability to hire a tax professional.

Taxpayers with limited resources should not be shut out of penalty relief because they were not able to hire a tax professional and instead looked to advice that seemed reasonable to them, recalling the Supreme Court’s statement in Boyle that most taxpayers are not competent to discern errors in tax advice. As one of the facts and circumstances, the IRS should consider the taxpayer’s access to a tax professional, and, whether the taxpayer was not able to hire a tax professional, either because of lack of resources or lack of availability.

There is a basis for this approach already recognized by the IRS and the courts.  In Internal Revenue Manual (“IRM”), the IRS states that reasonable cause can include ignorance of the law, and looks to the taxpayer’s education, whether the taxpayer has previously been subject to the tax, if the taxpayer has been penalized before, if there were recent changes in the tax forms or law that a taxpayer could not reasonably be expected to know, and the level of complexity of the issue.

In Pemberton v. Comm’r, T.C. Summ. Op. 2017-91, at *7–8, where the taxpayer deducted undergraduate education expenses.  This was incorrect, but the Court found that the taxpayer had consulted an IRS publication and believed that his education expenses were deductible under its guidance.  The Tax Court noted that “[a]lthough petitioner had some undergraduate education at the time he prepared his . .. Form 1040, he is not a tax professional. The determination of whether education expenses are deductible as ordinary and necessary business expenses under section 162 is a fact-intensive analysis and requires a reference to and analysis of caselaw as more fully discussed in this opinion.”   

In contrast, in Remy v. Comm’r, T.C. Memo. 1997-72, at *8, the Tax Court found that “it is evident that he attempted to research the tax law to find authority for his position,” but because there was such a weight of authority against the position (that he could reduce his taxable income by deducted the value of uncompensated services to clients), the Tax Court found that that there was no reasonable case.  The lesson from this case is that the taxpayer should double-check the advice on TikTok to confirm it has not been previously rejected by the IRS or the courts. 

A taxpayer who is relying on TikTok or other social media, or internet searches for tax information should maintain these sources. In Woodard v. Comm’r,  T.C. Summ.Op. 2009-150, at *3-4, the Tax Court seems open to the idea that internet research could provide reasonable cause, but the taxpayer was not able to provide any information about the sources he relied on.  “From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine. Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. Accordingly, we cannot conclude that [the taxpayer] exercised ordinary business care and prudence in selecting and relying upon the information he found on line.”

TikTok videos remain online indefinitely (unless the poster or the site removes them), but there is no guarantee that a particular video will be there in two or three years when the return is being audited. This is true for other internet sources as well.  In order to successfully raise a “TikTok Defense,” the taxpayer will need to preserve the video along with other tax records. 

Applying these standards to our examples here, a taxpayer who attempts to deduct a personal vacation is unlikely to avoid penalties by relying on the TikTok post above.  The poster is not a CPA or other tax professional, and the comments from other users should raise skepticism.  Also, this is not a new, obscure, or complex question, and other basic internet research, including, provides accurate information in a user-friendly format.  See e.g., IRS discussions here and here.

In contrast, the TikToks on the IRC § 179 deduction may provide a reasonable cause defense.  There are hundreds if not thousands of people claiming to use it or endorse it, many of whom appear to be tax professionals.  If taxpayers try to do their own internet research, the IRS’s guidance does not even appear on the first page of an internet search for “Section 179 heavy vehicle deduction.” When you find it, the IRS guidance contains terms like “depreciation,” and “MACR’s” that may not be familiar to the average taxpayer, see e.g., IRS Pub 946 and instructions for Form 4562. It is not surprising that instead of trying to find information about IRC § 179 from the IRS, that a taxpayer would return to quick and easy explanations on TikTok.   

Before closing out this post, I’d like to recognize a couple of TikTockers trying to bring some order to the chaos.  Nick Krop, “Nick the CPA,” very quickly knocks down the five worst tax ideas on TikTok including the purported IRC § 179 deduction for heavy vehicles. He has many other videos cutting through the nonsense of other posters that are worth checking out. 

Also, Alisha Rodriguez, a CPA at AJ’s Tax, provides a spot-on explanation of how to identify unscrupulous return preparers and why you should avoid them and hire credentialed tax professionals. And she even provides a version of this video in Spanish!

These posters show that just because information is on TikTok, rather than published by the IRS or in a more formal, academic or professional journal, does not mean that it is not reliable and cannot form the basis of a reasonable cause defense.

Government Concedes in Polish Lottery Case

A few months ago in Polish Lottery Winner’s Son Sues Over Penalties For Failing To Report Foreign Gifts I discussed Wrzesinski v US. For those of you who may not remember, the matter involved penalties under Section 6039F for failing to file Form 3520, the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

As I discussed, Krzysztof Wrzesinski emigrated to the US from Poland in 2005 at the age of 19. About five years later his mom, who still lived in Poland, won the Polish lottery. She took the proceeds and made gifts to Krzysztof of $830,000 over the course of 2010 and 2011.

Krzysztof’s tax return preparer told him that he need not file any forms with his tax returns and that the gift proceeds were exempt from gross income. 

While the proceeds were excluded from gross income, Krzysztof was hit with penalties in the amount of $87,500.00 and $120,000.00 for 2010 and 2011. Appeals abated much of those, but not about $45,000.

Turns out that last week DOJ has filed a status report indicating that it has conceded, and that Krzysztof will be receiving a refund in a couple of months.

Hat tip to Dan Price, who, in a post on Linked In, reasonably suggests that he hopes the concession will lead “IRS to acknowledge reasonable cause in more foreign gift penalty cases”.

The IRS’s Aggressive Enforcement of Foreign Information Return Penalties Has Created Ethical Dilemmas For Practitioners (Part 2)

In today’s post, Megan L. Brackney.turns to the challenging issues that practitioners must confront when faced with a client or potential client’s failure to file foreign information returns. Les

Ethical Standards Related to a Client’s Non-Compliance With Foreign Information Reporting

In yesterday’s post, I discussed some common penalties for failing to file foreign information returns and the practical and legal challenges associated with establishing that a client is entitled to relief from those penalties. Today we focus on how this penalty regime raises difficult ethical issues for practitioners who want to zealously represent their clients but also want to practice in a way that is consistent with their responsibilities and duties.

Circular 230 governs attorneys, CPA’s, enrolled agents, and others who practice before the IRS. On the subject of a taxpayer’s error or omission, Circular 230, Section 10.21 states as follows:

A practitioner who . . . knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return . . . must advise the client promptly of the fact of such noncompliance, error, or omission.” 

This section goes on to say that “the practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.”   It does not, however, require the practitioner to advise the client to self-correct. 

The Statements on Standards for Tax Services (“SSTS”),SSTS No. 6 contains a slightly different iteration of the duties concerning knowledge of a client’s error or omission:

A member should inform the taxpayer promptly upon becoming aware of an error in a previously filed return, an error in a return that is the subject of an administrative proceeding, or a taxpayer’s failure to file a required return.  A member also should advise the taxpayer of the potential consequences of the error and recommend the corrective measures to be taken.

In SSTS No. 6(13) (Explanation).  the AICPA explains, however, that the SSTS do not require CPAs to advise clients to amend if “an error has no more than an insignificant effect on the taxpayer’s tax liability,” a question which  “is left to the professional judgment of the member based on all the facts and circumstances known to the member.”

On the taxpayer’s side, it is generally understood that taxpayers do not have an obligation to file amended returns. As stated in Badaracco v. Comm’r, 464 U.S. 386, 393 (1984), “[t]he Internal Revenue Code does not explicitly provide either for a taxpayer’s filing, or for the Commissioner’s acceptance, of an amended return; instead, an amended return is a creature of administrative origin and grace.”)

It is also generally understood that a tax practitioner cannot advise a client not to file a return that is currently due.  There is no guidance on whether the same is true for a delinquent return once the filing deadline has passed.  Do tax practitioners have an unending obligation to recommend that their clients file delinquent returns? 


The IRS’s policy is to solicit unfiled income tax returns for the prior six years. See IRS Policy Statement 5-133, Delinquent returns—enforcement of filing requirements (IRM (08-04-2006) ( “Normally, application of the above criteria will result in enforcement of delinquency procedures for not more than six (6) years. Enforcement beyond such period will not be undertaken without prior managerial approval.”). This indicates that there may be some period of time after which we would not view a practitioner’s advice not to file a tax return as unethical but this is by no means a clear standard (Last season’s Form 1040? Ten years ago?). 

Another aspect of the practitioner’s ethical duties is the prohibition on basing advice on the likelihood of audit.  For purposes of advising a client on a return position, it is clear that the tax practitioner cannot consider the likelihood of audit but must instead determine whether the position is objectively reasonable.I.R.C. § 6694(a)(2); Circular 230 10.34; SSTS No. 1(4), (5).   Circular 230, Section 10.37(a)(2) states that “the Practitioner must not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.”See also Regulations Governing Practice Before the Internal Revenue Service, 79 FR 33685-01 (“Treasury and the IRS agree that audit risk should not be considered by practitioners in the course of advising a client on a Federal tax matter, regardless of the form in which the advice is given.” ).

Does this rule apply when advising on whether to correct a past failure to file? 

What Advice Can We Give? 

fter considering the above ethical standards, if we return to the example of the college student, we know it is highly likely that if she files the Form 3520, the IRS will impose the maximum penalty.  If she does not self-correct, given the low audit rates and the fact that her non-compliance was several years ago, there is a very strong chance that the IRS will never audit this tax year.  Are we doing this client a disservice by not providing her with this information when as she decides whether or not to file the Form 3520 now?  Do the ethical standards for tax practitioners actually require me to lead my client into financial ruin in order to correct a five-year old mistake that caused no actual harm? 

It is not clear how the ethical rules apply in this context.  Is a taxpayer who previously filed an income return but failed to file a foreign information return more like a taxpayer filing an amended return or filing a delinquent return?   Certain foreign information returns, like Forms 5471 and 8938, are attached to the income tax return. And, the IRS has instructed that when taxpayers file these returns late, they be accompanied with a Form 1040X, even if there are no changes to the income tax return.   

One could argue that a practitioner does not have an ethical duty to advise clients to file delinquent Forms 5471 and 8938 and other foreign information returns filed with the income tax returns because that would be the equivalent of filing an amended return. 

But what about Form 3520?  As the instructions provide, Form 3520 is not filed with the income tax return, but separately filed with the IRS Service Center in Ogden, Utah. Is filing a Form 3520 more like filing a delinquent income tax return?

I have difficult time believing that there should be different ethical rules for forms attached to the income tax return, such as Form 8938, and a free-standing form like the Form 3520.  That is slicing it a bit too thin.  And many practitioners would say that for a delinquent return, after the filing deadline has passed, the situation is similar to that of an amended return, and they are not obligated to recommend that the client self-correct.  I think that this is a reasonable interpretation of the ethical rules, and that the Circular 230 practitioner is not required to recommend self-correction but should fully advise the client on the potential penalties, and the CPA should recommend self-correction if the failure to file a particular foreign information return is material.

What about the likelihood that a taxpayer will be audited in the future, after the non-compliance has already occurred?  Is it unethical for a practitioner to advise the client in our example ho failed to file the Form 3520 five years ago that there is almost no chance that the IRS will audit this issue?  The statute of limitations for assessment does not close until the taxpayer files all required foreign information returns.  I.R.C. § 6501(c)(8).  The same is true for income tax returns, for which the statute of limitations does not begin to run until the return is filed, but nonetheless the standard advice for long-term non-filers is to just file returns for the preceding six years.              

As to discussing the likelihood of audits, this information is publicly available,and we should be able to discuss it if a client asks.  However, I would still not base my advice on the likelihood of audit, as even with the currently low rates, I cannot accurately predict whether a particular client will be audited.  However, we can advise our clients on the potential outcomes if they are audited so that they can weight the cost of voluntarily compliance versus waiting to be contacted by the IRS. 

I believe practitioners should be able to use their professional judgment to advise clients while still upholding their ethical obligations to the IRS and the tax system.  On the other side, the IRS should re-think its enforcement of these penalties in order to encourage, rather than punish, voluntary compliance, and, as the IRM provides, live up to its own obligations to ensure that penalties “encourage noncompliant taxpayers to comply,” and are “objectively proportioned to the offense.” I genuinely want to encourage tax compliance, but it is challenging when it is so harshly penalized.  The IRS could help tax practitioners, as well as taxpayers, by providing some reasonable options for correcting past failures to file foreign information returns.

The IRS’s Aggressive Enforcement Of Foreign Information Return Penalties Has Created Ethical Dilemmas For Practitioners (Part 1)

Today’s guest post is the first of a two-part series by Megan L. Brackney. These posts raise important questions about practitioners’ ethical responsibilities when confronting clients’ potential exposure to penalties for failing to file foreign information returns. Megan previously wrote a terrific series of posts considering problems with the IRS’s administration of these penalties, and in today and tomorrow’s posts Megan situates how these problems raise challenges for practitioners wanting to effectively and ethically represent their clients.

Megan is a partner at Kostelanetz LLP in New York who focuses her practice in civil and criminal tax controversies. She would like to thank Grace Hall for her assistance in researching this series.  Grace was a paralegal in the D.C. office of the firm and is now attending the University of Virginia Law School. Les

The IRS’s practice of assessing penalties against taxpayers who voluntarily attempt to get into compliance with their filing of foreign information returns puts tax practitioners in a difficult position.  Most practitioners understand that they have an obligation to the tax system and genuinely strive to comply with that obligation to assist their clients with compliance. And, indeed, most taxpayers believe in tax compliance.  See Comprehensive Taxpayer Attitude Survey, 2017 Executive Report, Practitioners also have duties to their clients to ensure that they are not recommending actions that will cause them to unnecessarily incur penalties.  In the past several years, as the IRS continues to impose the maximum level of penalties against taxpayers who file untimely or incomplete foreign information returns, it is getting harder for practitioners to recommend that clients should self-correct, as the outcome is the same if they do not self-correct and are later audited.  

Most of us would agree, for instance, that a young person who received a reportable (but nontaxable) gift from a foreign relative for the first time and who prepared her own return and did not know about the Form 3520 requirement at the time of filing, but then filed it 6 months after learning about the filing requirement should not have to pay a penalty of 25% of the foreign gift to the IRS.  The IRS, however, would assess this penalty without a second thought – and indeed does so with regularity.


Considering the example above, assume that your client has come to you for advice before she files the late Form 3520.  The client she tells you that she received the gift 5 years ago but has heard that the IRS could still assess penalties, and that she has limited financial resources such that a large penalty would be financially devastating to her.  If she asks whether you recommend filing the Form 3520 reporting the foreign gift now, knowing that this will immediately result in a penalty of 25% of the amount of the gift, and that if the client likely would not be able to satisfy the IRS’s interpretation of the standard for reasonable cause and thus  would likely be unsuccessful in challenging a penalty, what is your advice?  Do you have an ethical duty to advise the client to file the delinquent Form 3520 despite knowing what the outcome will be?  How do you balance your duty to tax system and ethical obligations under Circular 230 with your duty to obtain the best possible outcome for your client And can you consider the likelihood that the client will be audited in giving advice as to whether she should file the late Form 3520? 

Before discussing the practitioner’s ethical duties, we will briefly review the common foreign information return filing requirements and penalties to provide context for this discussion. 

Basic Background on Foreign Information Return Penalties – Types and Amounts of Penalties

Foreign information return penalties include penalties for failure to file a host of forms that report U.S. taxpayer’s foreign assets and transactions.  The forms for which we most commonly see the assessment of penalties are Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations), Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business), Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts), and Form 3520-A (Annual Information Return of Foreign Trust with U.S. Owner), and other forms. Forms 3520 and 3520-A were the subject of an IRS Large Business and International “Campaign,” which the IRS discontinued on February 28, 2022. (We note that there are several other foreign information returns, but this article focuses on the forms for which we see the most IRS penalty action.

This post focuses only on the Title 26 foreign information return penalties and does not address the IRS’s enforcement of penalties for failure to file FinCen Form 114 (the “FBAR”), as those are not assessed under Title 26 (the Internal Revenue Code), but Title 31 (the Bank Secrecy Act). The rules for assessment and collection of FBAR penalties are contained in 31 U.S.C. § 5321..Failure to file Form 8938 (Statement of Specified Foreign Financial Assets) is also subject to penalties, but we have not seen the same level of enforcement of penalties as with the forms listed above.  This may change in the future, however, as the Treasury Inspector General for Tax Administration has criticized the IRS for its lack of enforcement in this area.  Additional Actions Are Needed to Address Non-Filing and Non-Reporting Compliance Under the Foreign Account Tax Compliance Act

The penalties for not filing Forms 5471 and 8938 are $10,000 for the initial failure to file the form, and an additional $10,000 for every 30-day period, or part thereof, after the IRS has notified the taxpayer of the failure to file, up to a maximum of $50,000, meaning that the IRS can assess penalties of up to $60,000 for each form.        Beginning with the 2018 tax years, the penalty for failure to file Forms 5472 increased to $25,000 per failure, an additional $25,000 with every 30-day period, or part thereof, after the IRS has mailed a notice of failure, with no outer limits. See I.R.C. §§ 6038, 6038A, 6038B, 6038C, 6039F, 6677

The penalty for not reporting a transaction with a foreign trust on Form 3520 is 35% of the “gross reportable amount,” increasing by $10,000 for every thirty days for which the failure to report continues up to the “gross reportable amount.”  As per Section 6677(c), the “gross reportable amount” is the transfer of any money or property (directly or indirectly) to a foreign trust by a U.S. person, or the aggregate amount of the distributions so received from such trust during such taxable year.

The penalty for failure to file Form 3520-A, results in penalties of 5% of the “gross reportable amount.” The gross reportable amount for this penalty is “the gross value of the portion of the trust’s assets at the close of the year treated as owned by the United States person.”  If the IRS notifies a taxpayer of a failure to file the Form 3520-A, and the taxpayer does not file the form within the next 90 days, there is an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure to file continues, up to the gross reportable amount. I.R.C. §§ 6048(b); 6667(b), (c).

These penalties are related to the failure to file, or the incomplete filing, of these foreign information returns, and are not related to any tax deficiency.  Accordingly, the IRS can – and frequently does – assess these penalties even where there is no tax due as a result of the failure to file or the incomplete form.  Despite the policy statement in the Internal Revenue Manual that penalties should “be objectively proportioned to the offense,”( see IRM (11-25-2011)) the IRS routinely assesses the maximum amount of foreign information return penalties even for short delays and where there is no tax due as a result of the late filing.

For all of the foreign information return penalties, reasonable cause is a defense.. The IRS applies the same standards for reasonable cause for failure to file income tax returns under I.R.C. § 6651 to failure to file foreign information returns, i.e., the exercise of ordinary business care and prudence. See e.g., Chief Counsel Advisory200748006. Many clients simply cannot meet this standard (at least as the IRS interprets it). These are taxpayers who were not willful and who did not intend to evade tax (and in many cases, there is no tax liability related to the late filing of the foreign information returns), but who may have been negligent or could have made a better effort at understanding their filing obligations.

In Notice 2022-36, the IRS recently provided some limited relief to taxpayers who had not filed, or had already been assessed penalties for late filing of, several different forms, including Forms 3520, 3520-A, and some Forms 5471. This relief is limited to the 2019 and 2020 tax years, and penalties “assessed by the campus assessment program” with respect to Forms 3520 and 3520-A (Annual Information Return of Foreign Trust with U.S. Owner).  The IRS also limited relief to taxpayers who were able to file their delinquent returns within the 37-day period between August 24, 2022, the date that IRS announced Notice 2022-36, and the September 30, 2022, deadline. In addition, Notice 2002-36 stated that the IRS will cancel penalty charges for those forms and years, and issue refunds, as appropriate. 

Notice 2002-36 provided cold comfort as it did not provide relief for earlier years and applied to a limited category of forms, and did not guarantee that the IRS would not assess penalties, only that they would not systematically assess them.  It is noteworthy that this limited relief was in no way a recognition of the harsh consequences to taxpayers from the systematic assessment of penalties.  The only stated reason for the relief was that there are better uses of IRS resources given its backlog after the pandemic and budget constraints, stating “[t]he Treasury Department and the IRS have determined that the penalty relief described in this notice will allow the IRS to focus its resources more effectively, as well as provide relief to taxpayers affected by the COVID-19 pandemic.”   Notice 2022-36 did not come close to alleviating the burdens on taxpayers who want to be compliant by filing delinquent foreign information returns. 

There are no other programs or procedures available for a taxpayer who has not understated their income to file a delinquent foreign information return without being subject to penalties.  Other than Notice 2022-36, which was of limited utility, the IRS has not offered a method of self-correcting with reduced penalties.  Instead, the only option for a taxpayer who wants to come into compliance is to file late and incur penalties.  Theoretically, a taxpayer could make a voluntary disclosure, but the penalty of 50% of the unreported offshore asset makes this option untenable, and the voluntary disclosure procedure is intended to apply in situations where the taxpayer has acted willfully and has concern about criminal liability, which is not the case where a taxpayer missed a filing deadline but does not owe any additional tax.

The IRS’s Streamlined Filing procedures are not available for taxpayers who do not owe any additional tax related to their non-compliance. This is an oddity of the current system – that a U.S. taxpayer who lives in the U.S., and has not reported income from a foreign asset is offered an opportunity to self-correct in exchange for payment of the tax and a reduced penalty of 5% of the value of the unreported foreign asset, while a taxpayers who lives in the U.S. and has not underreported their income will be subject to the maximum amount of penalties.

It is also important to note, as Les discussed in Tax Court To Consider IRS Procedure For Imposing Information Reporting Penalties, that foreign information return penalties are “assessable penalties,” meaning that they are “paid upon notice and demand” and are not subject to the deficiency procedures, and thus cannot be challenged in Tax Court (with one narrow exception under Collection Due Process if the taxpayer is not offered review by the IRS Independent Office of Appeals).Despite the IRM allowing for pre-payment review, the IRS sometimes initiates enforced collection before the taxpayers have completed their appeal, and frequently sends collection notices, including notices of intent to levy, before the taxpayers’ deadlines to submit a protest has even passed.  This means that the taxpayer will receive a notice and demand for the payment and will not have any pre-assessment right to challenge the penalty or raise any defenses. The taxpayer should receive Appeals review, and also has a right to pay the penalty and bring a claim for refund, and then bring a suit in district court or the federal court of claims if the IRS denies the refund. Full payment and the Flora rule can impose a significant barrier. Moreover, these procedures are burdensome, and also may not be successful, as the taxpayer will have the burden of providing reasonable cause, which is the only defense available if the penalty was otherwise properly assessed.

This article does not discuss these procedures or likelihood of success, but merely notes, for the purposes of the issue under discussion (i) other than the returns filed under Notice 2022-36, the IRS frequently systematically assesses penalties for late filing of certain foreign information returns; (ii) the burden is on the taxpayer to challenge the penalty and raise any defenses; (iii) it is unlikely that the IRS or Appeals will abate the penalty without a strong showing of reasonable cause; and (iv) for most taxpayers, the only possibility for judicial review will be after they pay the penalty in full and file a refund claim.

In tomorrow’s post, we will discuss the ethical standards that practitioners must address when faced with a client’s failure to comply with the information reporting obligations discussed today.

Polish Lottery Winner’s Son Sues Over Penalties For Failing To Report Foreign Gifts

The other day I read in Tax Notes the complaint in Wrzesinski v US. I usually do not write about cases at this stage but it is a head scratcher.

Wrzesinski involves a refund suit for a hefty penalty under Section 6039F for failing to file Form 3520, the Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

Krzysztof Wrzesinski emigrated to the US from Poland in 2005 at the age of 19. About five years later his mom, who still lived in Poland, won the Polish lottery. She took the proceeds and made gifts to Krzysztof of $830,000 over the course of 2010 and 2011.


According to the complaint, prior to receiving the gift, Krzysztof consulted an accountant who told him he did not need to file any forms with his tax returns and that the gift proceeds were exempt from gross income. 

Fast-forward about 8 years and Krzysztof, now a Philly cop, wants to make a gift to his godson. Searching the internet about consequences of that re-gift, he discovers that when he received the gift from his mom, he was supposed to file a Form 3520 to report the foreign sourced gifts.  In 2018, he contacts a Philly tax attorney for assistance with filing the forms and uses the “Delinquent International Information Return Submission Procedures.” As per those procedures, he explained in the submission his earlier reliance on an advisor and claimed that he had reasonable cause for failing to file the forms for both years. 

About a year later IRS assesses penalties anyway; $87,500.00 and $120,000.00 for 2010 and 2011. He files a protest, hoping to get the matter to Appeals. The protest gets lost in the system, and he gets TAS to intervene to get the matter before Appeals. 

About another year later Appeals abated $70,000 of the $87,000 penalty assessed for 2010 and $96,000 of the $120,000 penalty assessed for  2011. The Appeals write up indicated: “Case resolution based on ‘Hazards of Litigation’”; the remaining $41,500 in penalties was sustained.

Krzysztof paid the balance, and filed refund claims for both years. In denying one of the years’ claims the denial referred to the claim as “frivolous.”

Assuming the facts are as they are alleged (and they were properly before Appeals), and the taxpayer’s accountant was competent, I am struggling to see why Appeals did not fully concede.  The IRS had another chance to make this right when it considered the refund claim. Under Boyle and subsequent cases, reliance on an advisor that is premised on a mistake of law relating to the need to file a return at all differs from a nondelegable  duty as to when a taxpayer needs to file a return. And Appeals abated 80% of the penalty initially, an indication that it knew its position is shaky.

According to the IRS “[p]enalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code.” I struggle to see how leaving thousands of dollars of penalties on the books for what seems like a good faith mistake based on what an advisor told makes any sense. Luckily for Wrzesinski, he was able to fully pay the balance of the penalties; otherwise Flora would have prevented him from bringing a refund suit. Of course, there is always the option of pursuing the initial advisor for malpractice, but that has costs.

Lamprecht v Comm’r: Statute of Limitations, Qualified Amended Returns And The Issuance Of A John Doe Summons

The recent case of Lamprecht v Commissioner highlights some interesting nuances in applying the statute of limitations on assessment when a taxpayer files an amended return and the IRS uses a John Doe summons to gather information about taxpayers.

The Lamprechts came to the IRS’s attention as part of the government’s efforts to detect US citizens and residents who had Swiss and other jurisdictions’ bank accounts and income associated with those accounts that went unreported.


In 2010 the Lamprechs, Swiss citizens who had green cards and a residence in Tiburon, California, filed amended 2006 and 2007 returns that reported previously omitted income from their Swiss UBS accounts. IRS examined the returns and proposed accuracy-related penalties for both years.  The taxpayers timely petitioned to Tax Court, challenging the penalties on multiple grounds, including that that their amended returns were “qualified amended returns”, that any proposed assessment of the accuracy-related penalties for 2006 and 2007 would be barred by the statute of limitations, and the IRS did not receive proper supervisory approval for the penalties under 6751(b) (note I will not discuss the 6751 issue in this post).

The procedural posture that triggered this opinion involved cross motions for summary judgment. The motions focused on the substantial understatement of income tax penalty (the government’s answer had also alleged a fraud penalty but the government later conceded the fraud penalty).

Lamprecht involves a John Doe summons (JDS), a topic I have been discussing here lately (see First Circuit Finds Anti-Injunction Act Does Not Bar Challenge to IRS’s Use of John Doe Summons That Gathered Taxpayer’s Virtual Currency Transactions and which also is discussed extensively Saltzman and Book IRS Practice and Procedure in Chapter 13). The Lamprechts’ 2006 and 2007 original 1040’s were short by about $6 million in interest, capital gains and commissions that flowed through their UBS accounts. The amended returns included the previously unreported income.

The Lamprechts’ amended returns in 2010 came after the ex parte IRS 2008 filing in federal district court to allow use of the JDS process to get identifying information about US taxpayers with accounts at UBS or its affiliates. After getting authorization, IRS issued the JDS to UBS in July of 2008. After the government initiated a February 2009 enforcement proceeding, the government of Switzerland joined in the enforcement suit as amicus curiae. In August of 2009 the enforcement suit was resolved by two agreements. The first agreement established a process for the exchange under the US –Swiss treaty that included the Swiss Federal Tax Administration and would in its terms “achieve the U.S. tax compliance goals of the UBS [John Doe] Summons while also respecting Swiss sovereignty.” The second agreement provided that “the IRS would “withdraw with prejudice” the UBS John Doe summons after receiving information concerning bank accounts from UBS pursuant to the treaty request for administrative assistance.”

In November of 2010, when IRS obtained the information it sought, the IRS formally withdrew the JDS (as we will see below, these different dates matter for SOL purposes).

Against this background, as most readers know under Section 6501(a)(1) the time period for assessing additional tax is generally three years from the filing of a return. For “substantial omissions” from gross income (greater than 25% of the amount of gross income stated in the return) that period is doubled to six years.  In addition, when IRS serves a summons, and that summons is not resolved within six months of service, then the period of limitations for assessment is suspended from the six-month anniversary of service of the summons until its final resolution. 

The Lamprechts agreed that the omission with respect to their original returns was substantial, though they and the IRS differed on the application of the SOL in light of their amended returns and the summons suspension issue.

Qualified Amended Returns

Section 6662 provides that a “substantial understatement” is determined by reference to “the amount of the tax imposed which is shown on the return”. Regulations provide that a taxpayer who files a qualified amended return can use the amount of tax shown on those returns for determining whether the understatement is substantial. The regs, however, provide that an amended return is not a qualified amended return if the amended return was filed after the service of a JDS relating to a tax liability of a group that includes the taxpayer if the “taxpayer claimed a direct or indirect tax benefit from the type of activity that is the subject of the summons…”

There was no question that the Lamprechts’ amended return filing was after the service of the JDS; the Lamprechts, however, argued that their omission of the overseas income did not constitute a direct or indirect tax benefit.

The opinion rejected the Lamprechts’ position on a few grounds, essentially concluding that:

[t]he Lamprechts omitted all foreign source income from their original 2006 and 2007 tax returns, thereby substantially understating their gross income and corresponding tax liabilities, and in doing so they received the benefit of understated tax liabilities. Furthermore, during the examination of their 2006 and 2007 income tax returns, when the Lamprechts filed amended returns for 2006 and 2007 to report foreign income previously unreported, their representative asserted that Mr. Lamprecht “did not report his foreign source income and earnings on his originally filed returns because he thought that ‘everything Swiss was not taxable in the U.S.’”

The opinion went on to discuss how the omission of income directly led to their affirmatively claiming itemized deductions that would otherwise have been phased out, thus also undercutting the Lamprechts’ position that they failed to claim a benefit.

Impact of the Summons on the SOL

Once concluding that the understatement was substantial, the opinion went on to discuss whether the proposed assessment was timely given that the 2006 and 2007 were filed in April of 2007 and 2008 respectively and the IRS issued the notice of deficiency for both years more than six year later, in January of 2015.  The timeliness of the potential assessment turned on whether and when the running of the six-year limitations period was suspended by the service and final resolution of the UBS JDS.

The Lamprechts argued initially that there should be no suspension of the SOL because in its view the JDS was issued without a valid purpose, just to extend the SOL. The opinion swiftly brushed that aside, noting that there was no precedent for the use of a collateral proceeding against a taxpayer in the John Doe class to raise that challenge. Alternatively the court reasoned that under the liberal Powell standard they had not shown that the summons was issued for an invalid purpose.

That still left open precisely when the SOL was suspended. Under Section 7609(e) the service of the summons suspended the period of limitations for assessment once the summons had remained unresolved after 6 months from service; that six-month date was January 21, 2009.  The suspension ends on when the summons is finally resolved; the parties disagreed on when the matter was finally resolved.

The regs provide that a summons proceeding is  finally resolved “when the summons or any order enforcing any part of the summons is fully complied with and all appeals or requests for further review are disposed of, the period in which an appeal may be taken has expired or the period in which a request for further review may be made has expired.”

The Lamprechts claimed that the final resolution occurred in August of 2009, when the district court ordered dismissal of the government’s summons enforcement suit.

The government argued that final resolution occurred when IRS formally withdrew the summons on November 15, 2010, after it received the documents pursuant to the treaty and the matter was dismissed with prejudice. That over one-year difference mattered, because under the government’s position the SOL was suspended from January 21, 2009, to November 15, 2010 (i.e., for 664 days), with the six-year SOL for assessment for the 2006 and 2007 years thus still open when the IRS mailed the notices of deficiency in January of 2015, which further suspends the SOL.

The Tax Court agreed with the government, stating that the Lamprechts did “not assert (nor make any showing of) an earlier date by which UBS had “fully complied” with the summons and “all appeals or requests for review” had been “disposed of”.


This is an important government victory. This opinion is significant as it explores SOL issues in the context of aggressive IRS pursuit of taxpayers who have failed to report income in overseas accounts. The intersection of the qualified amended return rules and the somewhat unusual posture by which the government obtained documents pertaining to the Lamprechts on the surface make this a somewhat novel opinion. I suspect, however, that practitioners representing similarly situated taxpayers with overseas accounts, unreported income, amended returns and hefty penalties will carefully study this opinion.