Now, what is Bergmann about such that anyone other than the Bergmanns and the Government should even care about oral argument in the case? First the background. From my Federal Tax Procedure book (with bold face emphases on the particularly relevant portions):
2. Penalty Base - Tax Understatement; Qualified Amended Return (“QAR”).
The accuracy related penalties apply a penalty rate (20% or 40%) to a penalty base which is the tax underpayment. If a taxpayer reports $100 of tax and upon audit is determined to have owed $150, the underpayment is $50. Some portion or all of the underpayment may be subject to the accuracy related penalty.
I mentioned earlier in discussing amended returns that there is a special category of amended return called a qualified amended return (“QAR”). The QAR permits a taxpayer to treat the amount of tax reported on the QAR as the tax reported on an original return so that the accuracy related penalty will not apply. In the example above, if the taxpayer files a QAR reporting the correct $150 tax liability after reporting only $100 on the original return, the reporting of the correct $150 liability will avoid the accuracy related penalty. QAR relief does not apply, however, as to the amounts originally underreported attributable to fraud.\
What are the circumstances in which the taxpayer may achieve the benefit of the QAR? A QAR is an amended return filed after the original due date of the return (determined with extensions) but before any of the following events: (i) the date the taxpayer is first contacted for examination of the return; (ii) the date any person is contacted for a tax shelter promoter examination under § 6700; (iii) as to a pass-through entity item, the date the entity is first contacted for examination; (iv) the date a John Doe Summons is issued to identify the name of the taxpayer; and (v) as to certain tax shelter items, the dates of certain IRS initiatives published in the Internal Revenue Bulletin. Undisclosed listed transactions are excluded.
The QAR is a formal procedure to achieve a result in the civil penalty arena that a “voluntary disclosure” – often effected by amended return(s) – does in the criminal tax enforcement arena in generally the same relevant equitable circumstance – i.e., the IRS has not yet started a criminal investigation against the taxpayer or a related proceeding (e.g., § 6700 investigation or John Doe Summons) likely to lead to the taxpayer. These programs that permit taxpayers to avoid penalties – civil in the case of a qualified amended return and criminal in the case of the voluntary disclosure practice – are designed to encourage taxpayers to get right voluntarily with the IRS. The programs produce significant additional revenue that might otherwise escape the IRS net; in the circumstances, foregoing the penalties is consistent with overall revenue enforcement policies. I discussed the criminal voluntary disclosure policy earlier in this book.
There is yet another opportunity to avoid the impact of the accuracy related penalties. IRS procedures permit in some large case audits a taxpayer to make appropriate disclosures either by amended return or by statement that will then be treated as a qualified amended return, thus avoiding the accuracy related penalty under the concepts noted above. Taxpayers invoking this process should make sure that the disclosures are adequate.Rev. Proc. 94-69, 1994-2 C.B. 804, § 3.The relevant portion (bold-faced) is related to Section 6700 which may be viewed here.
The following summary of the Bergmann case was in an earlier M&C blog, here:
The Bergmanns participated in a listed transaction promoted by KPMG, known as the Short Option Strategy. When the Bergmanns filed their amended return in March 2004, the IRS had already served KPMG with summonses targeted at KMPG’s promotion of the Short Option Strategy. As discussed in an earlier post, the Tax Court held that the Bergmanns failed to timely file a qualified amended return and thus were subject to the 20-percent accuracy related penalty. Under the regulations in effect when the taxpayers filed their return, the time for filing a qualified amended return terminated when “any person described in § 6700(a) (relating to the penalty for promoting abusive tax shelters) is first contacted by the Internal Revenue Service concerning an examination of an activity described in § 6700(a) with respect to which the taxpayer claimed any benefit on the return . . . .” Treas. Reg. § 1.6664-2(c)(3)(ii). The Tax Court rejected the Bergmanns’ argument that the promoter provision of the qualified amended return regulations required the IRS to establish that KPMG was liable for the § 6700 promoter penalty.The taxpayers make the argument on appeal that the Tax Court applied the current QAR Regulations under which, they admit, they do not qualify rather than the Regulations applicable at the relevant time under which, they allege, they do qualify. I won't address the merits of the argument, although I do note M&C's quip that: "The taxpayers’ reply brief largely ignores the Government’s arguments."
I look briefly at the factual background for the case. Why did the taxpayers even bother to file an amended return? Well, the taxpayers had reason to believe that they were in the IRS's cross hairs for participating in one of KPMG"s too good to be true tax shelters (actually fraudulently too good to be true, of the bullshit variety sometimes addressed on this blog and the sister blog, Federal Tax Crimes Blog, here). The IRS offered an amnesty program to taxpayers which would mitigate the amount of the accuracy related penalty but not eliminate the penalty. Being the type of persons who would hire the best and brightest to help them avoid or evade (depending upon perspective) their taxes in the first place, the taxpayers necessarily were not averse to hiring the best and brightest to mitigate the damage when their game was up. Aha, they must have reasoned, we are in the crosshairs and know that it is not pretty for the taxpayers. But we can make it somewhat better by exploiting the QAR opportunity to avoid the penalty consequences of the taxpayers misbehavior. That is what that is all about. Should these taxpayers be relieved of any penalty for playing it fast and loose with the fisc. Perhaps in the procedural context, are they truly innocents with respect to the policy in the QAR provision when they are in the crosshairs and try again to mitigate the consequences of their behavior.
At any rate, the oral argument is now set for December 3. I know readers are excited about this and will anxioiusly await the Ninth Circuit's decision.