A cautionary tale about tax scams and erroneous claims for refund

September 24, 2015 by Diane Potter
Crime scene tape and magnifying glass over 1040 tax forms

There are a number of tax scams out there that can get you into big trouble. But tax nightmares aren’t just for scammers. They can happen to people who make seemingly innocent mistakes, and even to those who believe they are doing the right thing. This is a story about a taxpayer – let’s call him Abe –  who filed an amended return to claim a tax credit and ended up with an IRS penalty of $21,708.60.

It all began when Abe found himself subject to the Alternative Minimum Tax (AMT) to the tune of $3,181. A year or so later he heard something about the AMT Credit (Form 8801, Credit for Prior Year Minimum Tax) and remembered that he had paid the AMT tax in a previous year. The AMT Credit is quite complicated, but Abe did not seek any advice from anyone about how the credit worked or if he qualified for it before he amended his tax return in an attempt to claim it.  And when he filled out the form for the amended return, he transferred the wrong information to Form 8801, which resulted in a refund of over $108,000 − more money than he makes in a year!

Most people would wonder about a refund of that amount, but Abe mistakenly believed he was entitled to it. And since the IRS did not issue the refund to him in a timely manner, Abe contacted the Taxpayer Advocate’s office seeking their assistance. But instead of helping him get his refund faster, the call resulted in Abe’s amended tax return getting audited.

IRS Revenue Agents tend to be tough, but when he learned what the problem was the examiner who reviewed Abe’s case said he was willing to close the audit with no refund for Abe and no amount due from him either. But before he could do that he said he had to run it by his manager.  That’s when the erroneous refund claim penalty (IRC 6676) reared its ugly head.

The Internal Revenue Code states that the erroneous refund penalty may be imposed unless the taxpayer can show “reasonable basis” for the refund claim. “Reasonable basis” means that you have “substantial authority,” which generally means that you have a solid legal basis for your tax position. This is what the Revenue Agent’s manager was looking for when he requested that Abe provide a good reason why the penalty should not be imposed.

Even though Abe was the one who had entered the information on the amended tax return form, he blamed his tax software for the error. He was unable to produce any other explanation as to why he had filed this amended return that could convince the examiner’s manager to abate the penalty. The final outcome was that the IRS imposed the IRC 6676 penalty of more than 21K.

The moral of the story is this:  if you are unsure about something on your tax return – especially if something seems too good to be true – investigate further or seek out professional advice. It could save you from a terrible tax outcome and many nights of nightmares.

 

Recent Articles

Stack of books, graduation hat, and rolled up diploma
There are some tax-saving opportunities available for graduate school tuition, like the credits for undergraduate expenses. They each have some limitations.
Woman Reading Letter
The IRS sends out a CP14 notice to notify a taxpayer when they have unpaid taxes and/or penalties and interest. What should you do if you get a CP14?
Woman Shopping for Over the Counter Medications
When it comes to medications, you can only deduct the amounts that you pay for medicines or drugs that have been prescribed for you by a doctor.
April 2023 Calendar with Tax Day written on April 18th
In 2023 the tax returns are due April 18th for most taxpayers. However, if you live in California, Alabama, or Georgia your taxes may be due at a later date.
This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.