Potential Penalties and Ethical Problems in Filing an Amended Return: The Case of the Repentant Sports/Entertainment Figure's Legal Expenses Deduction

A prominent sports/entertainment figure walks into your office (all preparers should be so lucky). He is in a repentant mood--not because he escaped conviction for the murder of his former wife and her friend, but because he deducted his legal expenses in defending against the criminal prosecution and the civil wrongful death suit. This Article discusses the obligation of the taxpayer, even one as nefarious as the athlete posited, and the practitioner to file an amended return. As one pair of commentators has stated, “How should the amendment be made, and what are the possible consequences of amending a return?

Little has been written on this subject and even fewer answers have been provided.” First, this Article will briefly discuss the suggested hypothetical taxpayer and the rationale for deducting his legal expenses. Second, this Article will discuss the current status of the legal obligation to file an amended return. Third, this Article will discuss (a) the ethical obligations of the practitioner regarding amended returns; (b) the potential penalties against taxpayers and practitioners for not filing an amended return; (c) the effect of disclosure of the potentially questionable deduction on the original return; and (d) the propriety of the taxpayer and the practitioner discussing the audit lottery (the likelihood of being audited by the IRS). Finally, this Article will discuss the application of the legal, ethical, penalty, and disclosure requirements to the hypothetical taxpayer and preparer, and distinguish other hypothetical taxpayers.