That’s Judge Halpern’s lesson for Reginald Sampson and Gervel S. Sampson, a.k.a. Gervel S. Jones, in 2013 T. C. Memo. 212, filed 9/9/13.

Reg had two Sub Ss for his successful medical practice, and saved all his ledgers on QuickBooks, which his trusty accountant Bedig could access when preparing Reg’s and Gerv’s Forms 1040 and the Sub Ss 1120Ss. But being careful, Bedig wanted the hard copy back-ups. Problem was, claims Reg, his offices were being renovated and the back-ups were in storage and unavailable.

Bedig kept after Reg, but got nothing, so Bedig prepared the 1040s for the years at issue, but not the 1120-Ss. He did note on the 1040s that the pass-through items from the 1120Ss weren’t included, but would be furnished as soon as available. Bedig didn’t attach Form 8275 to the 1040s for either of the years at issue.

Now some say an 8275 is an immediate “please audit me” request. Maybe so, but IRS didn’t need an 8275 to audit both years, and nail Reg and Gerv. When the audit notice arrived, somehow the back-ups did, too, so Bedig prepared the 1120Ss, and 1040Xs, and sent them in.

Reg and Gerv owe tax big-time, and pay, but want to fight the penalties.

First, they claim their 1040Xs were qualified returns, within the meaning of Regulation section 1.6664-2(c)(3).

Judge Halpern: “Even if we were to disagree that the regulations are substantial authority for their treatment of the corporate income, petitioners argue that their understatements should be reduced or even eliminated because, pursuant to section 1.6664-2(c)(2), Income Tax Regs., the overall tax amounts shown on what they consider to be their returns include the additional corporate income shown on their ‘qualified amended return[s]’, as that term is defined in section 1.6664-2(c)(3), Income Tax Regs.” 2013 T. C. Memo. 212, at pp. 10-11.

No they aren’t, say IRS and Judge Halpern, because the 1040Xs weren’t filed until after the IRS sent the audit notices. Repentance comes too late. So no substantial authority for the underpayments.

In any event, they didn’t properly file Form 8275 for either year at issue, thus reasonable basis plus disclosure doesn’t work.

Unlike Dave Bauer, whose poor records were enough to get him off the negligence penalty (see my blogpost “The Truckdriver Shifts”, 6/4/12, for more about Dave Bauer), Reg and Gerv had records, and no reasonable basis not to estimate from what they had. They knew they’d had substantial income from their Sub Ss in past years.

It’s true that Bedig told Reg and Gerv he wasn’t putting in anything from the Sub Ss. So they might have assumed that they didn’t need to do more.

Except (and it’s a big except) “…Dr. Sampson was an experienced taxpayer. He was aware of the statement on each original return that he was signing under penalties of perjury and declaring that the returns ‘were true, correct, and complete.’ He knew that, with respect to pass-through items from the corporations, the original returns were, to say the least, not complete. He knew that, in years past, he had reported substantial income from the corporations. He had available to him the QuickBooks from which he, or [Bedig], could have estimated income from the corporations. Petitioners have not convinced us that, even if they understood [Bedig] to have been telling them that it was okay to omit income from the original returns, they had a reasonable basis to do so and that they acted in good faith in failing to estimate and report income from the corporations.”  2013 T. C. Memo. 212, at p. 23. (Name omitted).

Penalties affirmed.

Takeaway– Estimate and disclose, then amend in a hurry.