Posted by: Taxlitigator | May 1, 2015

Clinton Foundation to File Amended Returns, Should You?

The Clinton Foundation recently announced that it will be amending various previously filed annual information returns to, at least in part, reflect donations on a specific, rather than consolidated, basis.[1] IRS Form 990, “Return of Organization Exempt From Income Tax,” is an annual information return filed by organizations exempt from income tax under Internal Revenue Code section 501(a) and 501(c)(3). In certain situations, a central exempt organization can aggregate data from subordinate organizations and report the aggregate information on a consolidated Form 990.[2]

Apparently, the decision to amend various Clinton Foundation returns was, in part, prompted by a review of the Foundation’s otherwise publically available Forms 990 by the Reuters news agency.[3] Reuters news agency reported that the Clinton Foundation was under-reporting or over-reporting donations from foreign governments and in other cases omitting to break out government donations entirely when reporting revenue. In general, all information an exempt organization reports on its Form 990, including various schedules and attachments, must be available for public inspection,[4] although information regarding donors and contributors is not generally available for public inspection.[5]

Did the Clinton Foundation’s tax forms have major errors that resulted in “under- and over-reporting, by millions of dollars” as reported by Reuters? In a statement on its website, the Clinton Foundation responds “No. Total revenue was reflected accurately on each year’s tax form, and there was no under-reporting or over-reporting. We are in the midst of conducting a voluntary external review process and will determine whether to re-file after that process is completed. As far as we know, the only error on our tax forms was that government grants were mistakenly combined with all other contributions for three years. These grants were properly listed and broken out on audited financial statements and donors also were included on the annual donor listing. All total revenue and expenditures on these forms were accurate but as we are committed to transparency and accountability and as such, we expect to re-file.”[6]

If the foregoing is correct, it would appear that the Forms 990 were substantially accurate but the issue relates to consolidating rather than specifically identifying certain donor information. There is no information indicating that the aggregate amount of reported contributions was somehow inaccurate.

Is there any legal duty to correct an error on a previously filed tax return? Taxpayers are required to accurately report their income and deductions on a timely filed return.[7] However, there is absolutely no statutory requirement to file an amended return after an error or omission is discovered on a previously filed tax return. As stated by the U.S. Supreme Court in Badaracco v. Commissioner, an amended return is a “creature of administrative origin and grace” – neither the Code nor the underlying Treasury Regulations require a taxpayer to correct errors discovered in a previously filed tax or information tax returns.[8]

The return preparation and filing process is complex and cumbersome, to say the least. Information must often be obtained from numerous sources, reviewed and coordinated into a return subject to strict filing deadlines. Congress has forever considered tax simplification targeted at reducing taxpayer burden associated with this process. In this process, it is not uncommon for good faith mistakes to occur – whether by oversight, mathematical miscomputations, erroneous legal or factual assumptions, improper characterization of certain items, etc. In such situations, the Treasury Regulations provide that taxpayers “should” (rather than “shall” or “must”) file amended returns in certain circumstances.[9] If an amended return is filed, it must be as accurate as possible in all respects.

The timely filing of an amended return (a “Qualified Amended Return” or “QAR”) may encourage the waiver of potentially applicable penalties otherwise associated with whatever errors are set forth in a previously filed return.[10] A QAR effectively eliminates accuracy-related penalties by removing amounts shown on the amended return from the penalty calculation.

Significantly, even if timely, an amended return does not qualify as a QAR if the errors that are corrected in the amended return relate to a fraudulent position on the original return.[11] Why? In a voluntary compliance system of tax administration, taxpayers should be encouraged to voluntarily amend material errors in previously filed returns, even returns that for some reason may be deemed to include fraudulent positions

Does the return preparer have a duty to amend the return? A practitioner must advise a taxpayer if an error is discovered on a previously filed return.[12] Section 10.21 of Treasury Circular 230 provides that the practitioner must advise the taxpayer of a discovered error and of any consequences associated with the error in the return. However, the ultimate decision as to whether to actually file an amended return correcting any such error rests solely with the taxpayer. “Best practices” suggest that the practitioner render advice regarding methods of avoiding avoid accuracy-related penalties under the Code if the taxpayer acts in reliance upon such advice.[13]

Impact upon the current year? Even if an amended return is not filed to correct an error in a previous year, the current and subsequent years’ returns must be accurate. A practitioner is presumed to have exercised the requisite due diligence with respect to the preparation of a return if the practitioner relies in good faith on the work product of another person. The practitioner should establish relevant facts and the reasonableness of any assumptions or representations, apply the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arrive at a conclusion supported by the law and the facts.

A practitioner may generally rely in good faith without verification upon information furnished by the taxpayer. However, the practitioner may not ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete.[14] There remains a duty of inquiry if the information appears questionable.

Impact on the statute of limitations? Contrary to popular belief, filing an amended return does not extend the applicable period within which the IRS must determine the accuracy of the originally filed return. If errors in the original return are not changed, the general three-year statute of limitations will generally apply. Thereafter, the IRS may no longer determine an additional liability. A six-year statute of limitations applies if the taxpayer omits more than 25% of the income that is reported. In the case of a fraudulent return or if a return is simply not filed, the IRS may assess an additional liability at any time. If the applicabl e statute of limitations expires, the IRS may no longer assess an additional liability for the year involved. However, it must be noted that these statutes of limitations are subject to extension, voluntarily and otherwise.[15]

There is no statutory duty to amend a previously filed return. While it might be advisable to file an amended return, it is not mandatory. The practitioner must advise the taxpayer of errors discovered within a previously filed return and should render advice regarding how to possibly avoid potential penalties associated with such errors.

If the name “Clinton” was not associated with the Clinton Foundation, the consolidation of donor information might be deemed inconsequential not otherwise suggesting an amendment of already filed returns. However, if the taxpayer is an organization affiliated or previously affiliated with a former U.S. President and one or more potential future U.S. Presidents, the organization would likely be advised to amend even the most insignificant errors in its recently filed information returns. Others should balance the materiality of the underlying errors, potential consequences associated with amending the returns (or not), and other relevant facts. Current and future returns must be accurate, whether the earlier returns are amended or not.

[1] http://www.reuters.com/article/2015/04/23/us-usa-election-clinton-taxes-exclusive-idUSKBN0NE0CA20150423

[2] The Foundation’s subordinate Clinton Health Access Initiative (CHAI) is apparently also considering amending recently filed Forms 990.

[3] Some have asserted that, among other issues, in relevant years, the Clinton Foundation either filed and obscured consolidating financial information or elected to cease filing consolidating financial information. See http://www.wnd.com/2015/04/wall-street-analyst-uncovers-clinton-foundation-fraud/

[4] Internal Revenue Code section 6104(b); See IRS Form 4506-A (Request for Public Inspection or Copy of Exempt Organization IRS Form) and http://www.irs.gov/Charities-&-Non-Profits/Copies-of-Scanned-EO-Returns-Available

[5] Id.

[6] https://www.clintonfoundation.org/press/facts

[7] Filing Past Due Tax Returns, available at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Filing-Past-Due-Tax-Returns.

[8] See the U.S. Supreme Court decision in Badaracco v. Commissioner, 464 U.S. 386, 393 (1984) (the filing of an amended return does not start the running of the three-year statute of limitations if the original return was fraudulent. The Court noted that although Treas. Regs. 301.6211-1(a), 301.6402-3(a), 1.451-1(a), and 1.461- 1(a)(3)(i) refer to an amended return, none of them requires the filing of such a return) ; see also Broadhead, TCM 1955-328, affirmed  254 F.2d 169 (CA-5, 1958) (no Regulation requires the filing of amended returns); GCM 35738, 3/21/74 (there is no statutory authority for filing or accepting amended returns).

[9] See, e.g., see Treas. Reg.§ 1.451-1(a) (“If a taxpayer ascertains that an item should have been included in gross income in a prior taxable year, he should, if within the period of limitation, file an amended return and pay any additional tax due.”) and Treas. Reg.§ 1.461-1(a)(3) (“if a taxpayer ascertains that a liability was improperly taken into account in a prior taxable year, the taxpayer should, if within the period of limitation, file an amended return and pay any additional tax due.”); see also Badaracco, 464 U.S. at 392 (citing Hillsboro Nat’l Bank v. Comm’r, 460 U.S. 370 (1983).

[10] Treas. Reg. § 6664-2(c)(3).

[11] Id.

[12] Treasury Circular 230, § 10.21

[13] Treasury Circular 230, § 10.33

[14] Treasury Circular 230, § 10.22 and § 10.33

[15] Internal Revenue Code section 6501


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