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ok to file an incomplete return?

Technical topics regarding tax preparation.
#1
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Hello,

Taxpayer filed an extension before the July 15 deadline. She has w2 income,interest and dividends, stock transactions and a few rentals I've gotten all her tax documents but no information pertaining to the rentals.

Is it legitimate/legal to file a tax return before the 10/15 deadline based on the information i have to preclude a failure to file penalty? And then to follow it up with an amendment reporting all income and expense for the rentals?

Stated another way, is it considered fraudulent to knowingly file an incomplete return, even with the "good intention" of following it up with a complete return?

Deb
 

#2
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I don't know if it is legitimate/legal to do or not. However, I would not do it. Extended tax returns are due the same time every year. She has had over 9 months to get the information to you. Let her pay the penalty.
 

#3
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You have a couple options.
You can get her to try and make an estimated tax payment now for 4th qtr 2019, then in theory there is no tax due on the return for a penalty to be charged?
You could also try and ballpark the rental income and expenses to get the return as accurate as possible, and then amend if it ends up being profoundly off?
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Just a side note, which touches on another thread that's going on elsewhere.
By doing this for the client you are enabling their bad behavior, and providing them no incentive to not do this again next year.
I'd be inclined to let them pay the penalty, and then either they come earlier next year, or they go somewhere else.
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Perhaps there are special circumstances to this case so I'll just answer your question.
Fraudulent? perhaps technically. Do people do it? Yes, I would assume so. Will you get in trouble for it? Most likely not, especially if you estimate the rental information based on prior year, considering it is in good faith.
 

#4
JR1  
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Got one. Due to Covid, can't get a replacement from the state for a lost W2-g of heavy six figures. Yes, client lost it in a move, so it's their fault. Still....so making best guesses based on prior years and filing that sucker. Likely not off other than a few dollars of interest anyway....
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#5
CathysTaxes  
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And then what? You have an inaccurate return filed and the client isn't going to give you what you need to amend. I did that once, never again.
Cathy
CathysTaxes
 

#6
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Cathy.... great point... thanks!
 

#7
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Agree that I would give them my best guess as to what is due and let them pay it. If the reason for late filing is due to Covid like JR1's case, I think we have exceptions to the penalties there. Otherwise, just let it be late.
 

#8
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I have a client that has been unable to get one of his K1's. I filed the return with a statement that the K1 was not included in the return due to being unable to acquire it as of yet. Also stated the K1 would not have a material effect on the return
 

#9
LW25  
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The language of the jurat ("under penalty of perjury" etc.) referring to a "complete" return to the contrary notwithstanding, a Federal income tax return does not have to be a literally, perfectly "complete" return to qualify as a legally complete return under the Code. I prepare, and my clients file, these incomplete "complete" returns all the time. This is because of the the nature of my clients in my niche practice. This is the Zellerbach Paper doctrine, from the United States Supreme Court:

Perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such [. . . . ] and evinces an honest and genuine endeavor to satisfy the law. This is so even though at the time of filing the omissions or inaccuracies are such as to make amendment necessary.


--from Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180 (1934).

Also, see generally the U.S. Supreme Court decision in Badaracco v. Commissioner, 464 US 386 (1984).

The Beard Test

The Beard Test is the test often cited in federal courts today. A federal income tax return is a valid return if four elements are satisfied:

1) it must contain sufficient data to calculate tax liability;
(2) it must purport to be a return;
(3) it must be an honest and reasonable attempt to satisfy the requirements of the tax law; and
(4) it must be executed by the taxpayer under penalties of perjury.

See generally Beard v. Commissioner, 82 T.C. 766 (1984).

If absolute perfect completeness were a requirement for a "complete" return -- such that any incompleteness whatsoever would render the return a legal nullity -- then you arguably could have two Federal tax statutes imposing conflicting, opposite obligations: those requiring a timely return, and those requiring a complete return. Under Zellerbach Paper and Beard, however, this is not the law.

If you think it's important, what you can do is include a Form 8275 with a disclosure statement in the return, explaining what data is missing and why it is missing. I do this all the time. In nearly 30 years, I have never once had the Internal Revenue Service audit a return, or even question the lack of "completeness" based on any of these disclosures.
 

#10
JR1  
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Love that: Perfect accuracy or completeness is not necessary to rescue a return from nullity...
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#11
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But will filing the incomplete, imperfect return before 10/15, followed up by a return reporting several newly acquired rentals preclude the failure to file penalty?
 

#12
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What is the hurry to file? Look at it this way: late filing penalties are a percentage of the amount owed. Have the client make a payment that exceeds your best estimate of the final liability. Assuming you get him to pay in a little more than he is going to owe, the late filing penalty is a percentage of nothing and therefore moot. And the promise of getting the excess refunded is motivation for him to get the rest of the info. you need to finish the return.
Because on T.A. ten was the most you were allowed
 

#13
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But will filing the incomplete, imperfect return before 10/15, followed up by a return reporting several newly acquired rentals preclude the failure to file penalty?


Correct.

Have the client make a payment that exceeds your best estimate of the final liability. Assuming you get him to pay in a little more than he is going to owe, the late filing penalty is a percentage of nothing and therefore moot


Incorrect. The late filing penalty is calculated as a percentage of the tax due on the original due date of the tax returns.

https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=19432
 

#14
LW25  
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debdoestaxes wrote:But will filing the incomplete, imperfect return before 10/15, followed up by a return reporting several newly acquired rentals preclude the failure to file penalty?


Assuming that the taxpayer has satisfied the Beard test, the penalty for failure to timely file the return presumably would not be applicable. (Of course, the IRS could always argue that one or more elements of the Beard test was not met, but that's a separate problem.)

Amended returns

Another note: "Common sense" might seem to dictate that the taxpayer is required to file an amended return.

This is an area where "common sense" would be wrong.

Technically, under the Internal Revenue Code, a taxpayer has no legal obligation to file an amended return, even where the taxpayer knows of an error or omission in the original return. For CPAs who are members of the AICPA:

7. While performing services for a taxpayer, a member may become aware of an error in a previously filed return or may become aware that the taxpayer failed to file a required return. The member should advise the taxpayer of the error and the potential consequences, and recommend the measures to be taken. Similarly, when representing the taxpayer before a taxing authority in an administrative proceeding with respect to a return containing an error of which the member is aware, the member should advise the taxpayer to disclose the error to the taxing authority and of the potential consequences of not disclosing the error. Such advice and recommendation may be given orally.

8. It is the taxpayer’s responsibility to decide whether to correct the error. If the taxpayer does not correct an error, a member should consider whether to withdraw from the engagement and whether to continue a professional or employment relationship with the taxpayer. Although recognizing that the taxpayer may not be required by statute to correct an error by filing an amended return, a member should consider whether a taxpayer’s decision not to file an amended return or otherwise correct an error may predict future behavior that might require termination of the relationship.


--from paragraphs 7 & 8, Statement on Standards for Tax Services No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, Tax Executive Committee, American Institute of Certified Public Accountants (Nov. 2009; effective Jan. 1, 2010) (emphasis added).

From Tax Notes:

The Internal Revenue Code does not require a taxpayer to file an amended return to correct a mistake discovered after the filing of the original tax return. The words ‘‘amended return’’ scarcely appear in the code.


--from T. Keith Fogg and Calvin H. Johnson, “Amended Returns — Imposing a Duty to Correct Material Mistakes”, 120 Tax Notes 979, Tax Analysts (Sept. 8, 2008).

Fogg and Johnson use the phrase "discovered after the filing of the original tax return." However, the rule might apply regardless of when the error was discovered.

Also, from an article on the AICPA-related web site:

Legally, taxpayers are required to accurately compute and report their income, deductions, credits and tax liability on a timely filed return. However, there appears to be no authority in the Internal Revenue Code (IRC), the regulations or case law that imposes a legal duty on a taxpayer to file an amended return to correct an error or omission on a return previously filed. This is true regardless of whether the error omission has resulted in an understatement of tax due or whether the statute of limitations is still open with respect to that year.


---Thomas Wechter, J.D., L.L.M., “Obligations of Taxpayers and Tax-Return Preparers Regarding Amended Returns”, from AICPA-related web site (Oct. 15, 2009).
 

#15
LW25  
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For Circular 230 practitioners:

10.21 Knowledge of client’s omission.

A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, 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, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.


--31 CFR sec. 10.21 (emphasis added).

But what are the "consequences" as provided under the Code, etc.?

There is no statement in the Code or Treasury regs expressly imposing a duty to file an amended return. (If you want a tax refund, you may have to file an amended return to get it, but there's no general requirement that you claim a refund.) Arguably, the practitioner should tell the client that filing an amended return should be seriously considered (depending on specific facts and circumstances, of course), but should also tell the client that there is no general legal requirement to do so.

Failure to give the client the entire picture might even be considered malpractice.
 

#16
Noobie  
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LW25 - I think there is something to be said about the extent to which the return is incorrect or incomplete when filed. If you are intentionally filing a return that is missing 50% of the taxable income that should be on it, then I don't care what legal terminology you spout out, there is no way that is considered a complete return.

I am not saying you file something that egregious, but if you do, (in my opinion) then you are putting your licenses and freedom at risk for clients to get out of a penalty. A penalty which is often incurred due to the client's sheer laziness/procrastination or failure to stay organized.

In my opinion, your interpretation of error is also inaccurate. Error in this instance is meant to mean mistake, not intentional misrepresentation or omission of substantial taxable income.

Just because you haven't been caught, does not mean what you are doing isn't wrong.
 

#17
LW25  
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Noobie wrote:LW25 - I think there is something to be said about the extent to which the return is incorrect or incomplete when filed. If you are intentionally filing a return that is missing 50% of the taxable income that should be on it, then I don't care what legal terminology you spout out, there is no way that is considered a legally complete -- a legally valid -- return.


That is incorrect, as a matter of law. Depending on the facts and circumstances of the case, a taxpayer can file a return that omits ONE HUNDRED PERCENT of the taxable income that should be on the return, and YES, the return can still be considered a complete return.

And it's not a question of anyone "spouting out legal terminology." Your use of the word "intentionally" is also problematic. The law imposes a civil, monetary penalty and a criminal penalty for willful failure to timely file a return.

Under the Internal Revenue Code (but not necessarily in other laws), an action -- or a failure to take an action -- is "willful" if it involves the "voluntary, intentional violation of a known legal duty." I don't necessarily want to get into all the nuances, but the "intent" is only part of the formula. Your comments seem to imply that you think that an omission of 50% of taxable income is willful. As a matter of law, that is not necessarily correct. Again, facts and circumstances may vary the effect of the omission.

I am not saying you file something that egregious, but if you do, (in my opinion) then you are putting your licenses and freedom at risk for clients to get out of a penalty. A penalty which is often incurred due to the client's sheer laziness/procrastination or failure to stay organized.


You have not said exactly what you mean by "egregious" (other than the comment about a 50% omission). I understand that you feel the way you do. For me, the purpose of having the client file a TIMELY (but not "perfectly complete") return that appears to comply with the Code as interpreted by the Federal courts is to COMPLY WITH THE LAW, not to "avoid a penalty" -- regardless of the client's behavior in causing the problem.

In my opinion, your interpretation of error is also inaccurate. Error in this instance is meant to mean mistake, not intentional misrepresentation or omission of substantial taxable income.


I haven't provided an "interpretation" of the term "error" in my posts.

Just because you haven't been caught, does not mean what you are doing isn't wrong.


Caught doing what? Again, I am explaining the law. It sounds like you just don't want to accept that the law is what I have explained. I understand that you may feel this way, but you are incorrect. The law is as I have explained it.

As you know, U.S. Federal tax law is very complex. Sometimes -- in the area of tax law as well as other areas -- the law may seem counter-intuitive or even bizarre.
 

#18
Noobie  
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Caught filing tax returns with more than 20% of the gross income omitted. Could be considered filing a false or fraudulent return. It extends the statutes of limitations, and I believe pushes the issue over the line from being a monetarily punishment in the form of a penalty into being a possibly criminal infraction of the law and regs.

Extended statute of limitations:
https://www.journalofaccountancy.com/is ... eriod.html

Possible felonies:
https://www.browntax.com/tax-law-librar ... ion-72062/
 

#19
LW25  
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Noobie wrote:Caught filing tax returns with more than 20% of the gross income omitted. Could be considered filing a false or fraudulent return. It extends the statutes of limitations, and I believe pushes the issue over the line from being a monetarily punishment in the form of a penalty into being a possibly criminal infraction of the law and regs. [ . . . ]


Merely omitting 20% of the income does not necessarily mean that the statutory period of limitations is extended, or that the return filing is a criminal infraction.

The 20% understatement rule is found in section 6662. That penalty, if it is asserted, does not apply to an item where the facts are "adequately disclosed in the return or in a statement attached to the return". See section 6662(d)(2)(B)(ii)(I). This gets back to the information I posted above -- regarding tax return disclosure. The form you would use is typically Form 8275.

Again, the law would be applied to facts and circumstances of each case to determine whether a return is false or fraudulent. The statutory period of limitations is extended ONLY where the law applies to the facts and circumstances of the case.

To reiterate: Merely omitting a report of income from a Federal income tax return -- even a large amount of income -- does not necessarily make the return be invalid or fraudulent under the Internal Revenue Code.
 


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