Author David Gair*
In Exxon Mobil Corp. v. United States of America, from the United States District Court for the Northern District of Texas, ExxonMobil learned the hard way that filing amended tax returns can be very costly.
Some of the reasons why an amended return is dangerous are below, but first to the case:
ExxonMobil was involved in oil and gas ventures in Qatar and Malaysia, which for tax purposes were treated as partnerships and reported on the company’s consolidated tax returns. ExxonMobil had historically treated those transactions as mineral leases. In 2014 and 2015, ExxonMobil filed amended tax returns treating the transactions as purchases for tax years 2006-2009 and claiming refunds for overpaid income taxes in the amount of $1.35 Billion. The IRS not only disallowed the refund claims but also imposed a penalty under 26 U.S.C. § 6676 of approximately $200 million.
ExxonMobil ultimately escaped the penalty but it was not easy and it surely cost them a lot of money to fight it.
Section 6676 imposes a 20 percent penalty for filing an erroneous amended return. A taxpayer can defend against that penalty by proving to the IRS that it has a reasonable basis/reasonable cause for the amendment. That determination is highly factually based and ripe for litigation. In short, penalties can be hard to avoid.
The dangers of amended returns claiming refunds:
- IRS thinks fraud – Illegitimate tax shelter promoters develop schemes to file amended returns and obtain huge refunds. Thus they are viewed skeptically by the IRS. Any guaranty the promoter offers about success is usually worthless. Big refunds make the IRS think something untoward is going on, even if it is not.
- You will face an audit – Amended returns claiming refunds will almost assure you of an IRS audit. The cost and stress associated with an audit is substantial.
- There will be delays – It is not uncommon to face delays of months, if not years, in resolving your amended return.
How can the taxpayer protect itself?
- Is it too-good-to-be-true? – If you are approached by a tax savings program that will involve amending tax returns, beware! If something sounds too good to be true then it probably is.
- Fee payments – Tax saving promoters often want big upfront payments. You will likely never get them back if it goes wrong. Don’t pay them.
- Contingent fees – Tax savings program promoters often offer their services on a contingent fee basis. There are stringent ethical rules about these arrangements. Amended returns are an exception to the general prohibition on contingent fees for tax preparation. Know that this is a problematic area.
- The statute of limitations – Just because the IRS may accept an amended return and send a refund does not mean your claim was legitimate. The IRS generally has two years to come back and cause you grief and havoc. Example: if you receive a refund, pay the promoter, then pay it all back to the IRS with penalties and interest, you will be left holding the bag while the promoter enjoys his ill-gotten gains.
- Get an independent opinion – In order to have a legitimate chance of avoiding penalties should the IRS disallow the claim, a tax opinion analyzing all the facts and circumstances is invaluable. The tax promoter is NOT independent. And the independent tax professional cannot have ties to the promoter.
Hilton Valentine RIP.
*David is Board Certified in Tax Law and leader of Gray Reed’s Tax Controversy Practice Group.