If your tax return is incorrect and you have pending tax litigation with the IRS, can you argue that the tax return is incorrect? What if the time period for filing an amended tax return is still open? Should the court consider the new argument or should it rely on the incorrect tax return? The court addresses this in Pieron v. United States, No. 18-20489 (E.D. Mich. 2019).
Facts & Procedural History
The defendant was convicted of tax evasion. In the sentencing phase, the government concluded that the loss to the government was approx. $3.5 million. This was based on the Form 1040, U.S. Individual Income Tax Return, forms the taxpayer had filed.
The defendant introduced evidence suggesting that there was no gain from the sale of stock. Absent this gain, the defendant argued there was no loss to the government.
The government noted that it had no record of an investment in the stock, so the taxpayer had no basis in the stock. This resulted in a large gain and, ultimately, to the $3.5 million loss estimate.
The Doctrine of Judicial Estoppel
The doctrine of judicial estoppel prevents a taxpayer from taking a position that is contrary to the position taken earlier. It is a rule of efficiency. It allows litigation to proceed without veering off direction late in the proceeding.
The court in this case summarizes the rule as follows:
[W]here a party assumes a certain position in a legal proceeding, and succeeds in maintaining that position, he may not thereafter, simply because his interests have changed, assume a contrary position . . .
With tax cases, the evidence typically starts with the filing of tax returns, arguments in response to IRS positions, and then evidence at trial.
Here, the evidence at trial suggested that there was a gain. The defendant’s tax returns reported the gain, he reported the sale to the SEC suggesting there was a gain, and his tax attorney made statements at trial suggesting there was a gain.
Amended Tax Return Deadline
The defendant argued that he still had time to file an amended tax return. He was apparently correct in this regard. The time for filing an amended return had not passed.
Thus, he questioned whether it was too late to make arguments at sentencing when he could still file an amended return by law. Put another way, the defendant asked the court to consider the supporting evidence–rather than a tax return prepared by a third party that merely summarized a tax position.
The court noted that the IRS was not obligated to accept an amended return:
Though Pieron may still be able to file amended returns, the IRS is entitled to reject them. As stated by the Supreme Court, “the Internal Revenue Code does not explicitly provide either for a taxpayer’s filing, or for the Commissioner’s acceptance, of an amended return; instead, an amended return is a creature of administrative origin and grace.” Badaracco v. Commissioner of Internal Revenue Service, 464 U.S. 386, 393 (1984).
This issue often comes up in tax issues in bankruptcy. The question is whether an original return was filed and can be changed.
But here, the court noted that because the IRS did not have to accept an amended return, the court concluded that it did not have to consider the arguments as if an amended return was filed.
As such, the court held that the doctrine of judicial estoppel trumped the ability to file refund claims. But the court held that the IRS had the burden of proof on the amount of income (and it could not merely rely on bank statements) and that the defendant had the burden of proof on offsetting tax basis or expenses (that could be established using source documents).
In this case, the defendant was convicted of tax evasion. If he is successful in convincing the court that there was no tax loss to the government, he might be able to mitigate the impact of the conviction.