Amended Return Equals Guilty Plea

by Tom Yamachika, President, Tax Foundation Hawaii

We have been hearing through the grapevine that a number of examiners and auditors at the Department of Taxation have been using a “please amend your return” tactic.  It’s by no means a new strategy, but for those who haven’t gone through an audit before it can have a very profound side effect…that they know of and the poor taxpayer probably doesn’t.

Here’s how the strategy works.  An examiner or auditor comes to you and begins a state tax audit.  The auditor will probably ask for some documents or information, perhaps with a little back-and-forth.

Then, the auditor says: “Okay, I found these items of gross income that haven’t been reported.  Please amend your returns to include them.  When you do that, I will close the audit.”

Being the law-abiding and upstanding citizen that you are, you want to do what the auditor says to minimize the trouble that you are already in.

Now, here is what they know and you don’t.

If you amend your return, then the change to the tax return is considered to come from you, not from them.  Meaning that whether or not the amended return is correct, it’s your return and you can’t appeal it.

In the tax world, an amended return is the equivalent of pleading guilty.  Even if you might not have actually committed a crime, your amended return is basically a confession that you did, and the consequences that then befall you—fines, community service, prison time—are something that you yourself have opted into.

So let’s get back to the audit situation.  Should you amend that return?

If you completely agree with the auditor’s logic and conclusion, perhaps after asking a tax practitioner who has some experience in the issue you are being audited on, then maybe it’s okay to do that.  Know, however, that there will be penalties and interest to pay.

But if you have doubts that the auditor’s adjustments are correct, for example if the auditor is clobbering you for “insufficient documentation” and you have documentation that you thought was sufficient, you might want to consider fighting instead.  Ask the auditor to make his or her adjustments by assessment.  You will still have a tax bill to pay, but you will also have appeal rights.  If you amend your return, you don’t.

If you have appeal rights, you might be able to take your case to the Administrative Appeals Office within the Department, or to the Board of Review, or to Tax Appeal Court.  At this point you probably should have a practitioner advising you so you can know what your options are and the differences between them.  Some of your options, for example, require that you pay the disputed tax, penalty, and interest up front.  Other options don’t require you to do that.

And, once you perfect an appeal, you will be in a position to negotiate with the Department about settling your appeal.  After all, cases are seldom black and white.  They may be willing to give up something if you give up something.  About 90% of all lawsuits are settled this way, and many tax cases get settled as well.  Again, if you have no appeal rights the Department has no reason to negotiate with you.  If you’ve confessed to your tax deficiency, all that remains is for you to pay it or for them to beat it out of you.

Let the auditee beware!