IRS Provides Procedure for Certain Large Businesses to File Qualified Amended Returns

(Parker Tax Publishing November 2022)

The IRS issued a procedure for certain large corporations and partnerships whose tax returns for four of the last five years are (or were) under examination to file a qualified amended return and avoid the imposition of accuracy-related penalties under Code Sec. 6662(b)(1) and Code Sec. 6662(b)(2). Under the procedure, a properly completed Form 15307, Post-Filing Disclosure for Specified Large Business Taxpayers, is generally treated as a qualified amended return if it is furnished within 30 days of a written request from the IRS. Rev. Proc. 2022-39.

Background

Code Sec. 6662(b)(1) and Code Sec. 6662(b)(2) impose accuracy-related penalties equal to 20 percent of the portion of any underpayment that is attributable to (1) negligence or disregard of rules or regulations, or (2) any substantial understatement of income tax. Reg. Sec. 1.6662-3(c) provides, generally, that no penalty for disregarding rules or regulations will be imposed on (1) any underpayment attributable to an item or position that is adequately disclosed, for which the taxpayer has a reasonable basis, and(2) for penalties attributable to disregard of a regulation where such disregard represents a good faith challenge to the validity of the regulation.

Reg. Sec. 1.6662-3(c) and Reg. Sec. 1.6662-4(f) provide the methods for making adequate disclosures. These methods include attaching a properly completed Form 8275, Disclosure Statement, to an original return or to a qualified amended return in the case of an item or position other than one that is contrary to a regulation. In the case of a position contrary to a regulation, disclosure must be made on Form 8275-R, Regulation Disclosure Statement.

Reg. Sec. 1.6664-2(c)(3) generally provides, among other deadlines, that for purposes of the accuracy-related penalty, a "qualified amended return" is an amended return, or request for an administrative adjustment under Code Sec. 6227, that is filed after the due date of the return for the tax year (including extensions) and before the earliest of: (1) the date on which the IRS first contacts the taxpayer concerning an examination of the return, or (2) for certain pass-through items, the date on which the IRS first contacts the pass-through entity in connection with an examination of the return to which the pass-through item relates. Under Reg. Sec. 1.6664-2(c)(4)(ii), the IRS may prescribe by revenue procedure the manner in which the rules governing qualified amended returns apply to particular classes of taxpayers.

In Rev. Proc. 94-69, the IRS provided special procedures for taxpayers that were subject to audit each year under the now-discontinued Coordinated Examination Program (CEP). After elimination of the CEP in 2000, Rev. Proc. 94-69 was applied to taxpayers subject to audit under the Coordinated Industry Case Program (CIC). Taxpayers in the CEP and CIC programs were generally subject to a continuous examination covering each year's return and as such, amendments to filed returns were best addressed through a disclosure to the examination team rather than by filing a regular qualified amended return.

The special procedures set forth in Rev. Proc. 94-69 allowed taxpayers subject to the CEP and CIC to show additional tax due or to make adequate disclosures with respect to an item or a position and thereby avoid the imposition of accuracy-related penalties under Code Sec. 6662(b)(1) and Code Sec. 6662(b)(2). In general, the special procedures allowed these taxpayers to avoid or reduce the accuracy-related penalties to the extent that items resulting in additional tax were reported, or a position contrary to a rule was adequately disclosed, in a written statement furnished to the IRS within a 15-day window beginning with the IRS's written request for such statement.

In 2019, the IRS replaced the CIC Program with the Large Corporate Compliance Program (LCC). Under the LCC, large corporate taxpayers are selected for examination based on their risk profiles and data analytics. Large corporate taxpayers are no longer subject to planned continuous examinations. The IRS also implemented the Large Partnership Compliance Program (LPC) to address the IRS's compliance approach to large partnerships. The IRS announced in May 2019 that as a transition, Rev. Proc. 94-69 would continue to apply to any taxpayer that was both in the CIC (with an open CIC examination as of May 2019 for tax year 2016 and earlier tax years) and the LCC (for tax year 2017 and later tax years) (i.e., transition relief).

Rev. Proc. 2022-39

On November 16, the IRS issued Rev. Proc. 2022-39, which allows eligible taxpayers to avoid the accuracy-related penalties described in Code Sec. 6662(b)(1) and Code Sec. 6662(b)(2) to the extent that the taxpayer reports errors resulting in additional tax or adequately discloses the tax treatment of an item that has a reasonable basis as provided in Section 4 of the procedure.

An "eligible taxpayer" means any taxpayer selected for examination under the LCC (or successor program) if, on the date on which the IRS first contacts the taxpayer concerning an examination of an income tax return, at least four of the taxpayer's income tax returns for the five tax years preceding the tax year at issue are (or were) under examination under the LCC, the CIC, or a successor program. An eligible taxpayer also means any partnership selected for examination under the LPC (or successor program) if, on the date on which the IRS first contacts the partnership concerning an examination of a return of partnership income, at least four of the partnership's returns for the five tax years preceding the tax year at issue are (or were) under examination under the LPC (or successor program). The IRS stated that taxpayers selected for examination under the LCC or the LPC will be notified if they are eligible taxpayers under Rev. Proc. 2022-39.

Section 4 of Rev. Proc. 2022-39 provides that, for purposes of avoiding the imposition of the penalties under Code Sec. 6662(b)(1) and Code Sec. 6662(b)(2), a properly completed Form 15307, Post-Filing Disclosure for Specified Large Business Taxpayers, is treated as a qualified amended return with respect to a particular tax year of an eligible taxpayer if the taxpayer furnished it to the IRS personnel conducting the examination after the tax return for the particular tax year has been filed. However, the Form 15307 is treated as a qualified amended return only if it is furnished to the IRS no later than 30 days (or a later date agreed to in writing by the IRS with respect to a particular tax year) from the date of a written request to the taxpayer that the form be furnished with respect to that tax year.

Any additional tax liability with respect to the particular tax year resulting from the adjustments identified on an eligible taxpayer's Form 15307 that is agreed at the conclusion of the examination will be treated as an additional amount of tax shown on a qualified amended return for purposes of determining whether there is an underpayment of tax with respect to that tax year subject to penalty under Code Sec. 6662(b)(1) and Code Sec. 6662(b)(2). Any additional tax liability resulting from adjustments identified on Form 15307 with respect to a particular tax year that is unagreed at the conclusion of the examination (1) will be subject to the deficiency procedures prescribed by Code Sec. 6212 and Code Sec. 6213, or the partnership audit procedures prescribed by Code Sec. 6221 through Code Sec. 6241, as applicable; (2) will not reduce the underpayment subject to penalty under Code Sec. 6662(b)(1) for negligence; and (3) will not reduce the penalty for substantial understatement of income tax unless there was a reasonable basis for the taxpayer's tax treatment of the item identified in the written statement.

Practice Tip: The IRS noted that taxpayers not eligible for, or making disclosures beyond the scope of, the special procedures set forth in Rev. Proc. 2022-39 may use existing methods to avoid the imposition of penalties, including by filing a qualified amended return as described in and satisfying the requirements of Reg. Sec. 1.6664-2(c)(3), or by adequately disclosing the position on a properly completed Form 8275, Form 8275-R, or Schedule UTP, Uncertain Tax Position Statement, filed with a return and satisfying the requirements of Reg. Sec. 1.6662-3(c).

Rev. Proc. 2022-39 is effective for examinations of eligible taxpayers that begin after November 16, 2022. The transition relief announced by the IRS in May 2019 continues to apply to the taxpayers eligible for such relief with respect to examinations of tax year 2020 and earlier years. Transition relief does not apply with respect to the examination of tax year 2021 and later years.

For a discussion of qualified amended returns, see Parker Tax ¶250,165.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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