Updates and guidance on key IRS practice developments.

• Author: Dellinger, Kip

The QAR: Handle with care

The qualified amended income tax return (QAR) is a useful instrument in the tax professional's procedural tool bag. But as with a sharp tool, the tax adviser must ensure that it is handled with care to avoid harming the taxpayer that utilizes it.

What the QAR accomplishes

The effect of and requirements for filing a QAR are set forth in Regs. Secs. 1.6664-2(c)(2) and (3). The QAR is a creature of administrative relief initially instituted in the corporate tax shelter era of the late 1990s and modified and expanded in the early 2000s; it is not a statutory provision or a judicial doctrine. Its purpose is to encourage taxpayers to voluntarily file amended returns to report underpaid taxes on original returns or to disclose information that was or became required by law or regulatory authority--including in situations where no additional taxes are due. For partnerships subject to examinations at the partnership level, an Administrative Adjustment Request (AAR) pursuant to Sec. 6227 is filed instead of a QAR.

When a QAR is properly filed, the amount shown as tax on the original return includes the additional tax shown on the QAR for purposes of the accuracyrelated penalties of Sec. 6662, effectively reducing or eliminating an accuracyrelated penalty. A QAR may also be filed to satisfy the adequate-disclosure provisions (see Regs. Sec. 1.6664-2(c)(4)), which will similarly eliminate penalties for failure to adequately disclose a return position.

Beware the limitations on filing a QAR

Because the QAR is intended to provide penalty relief for voluntary compliance, its utilization is subject to several limitations, and the taxpayer and tax adviser must carefully review the limitation rules to ensure that one or more of the limiting provisions do not apply. The thrust of those rules is to disqualify an amended return in situations where the taxpayer or certain parties related to or advising the taxpayer have been contacted pertaining to an examination of or required disclosure in a tax return on the date of or prior to the filing of the amended return. Basically, to be "qualified," the amended return (or AAR) must be filed before the earliest of:

* The date the taxpayer is first contacted by the IRS regarding an examination of the return to be amended;

* The date that any person is contacted by the IRS concerning an examination of that person relating to the promotion of an abusive tax shelter for which the taxpayer filing...