Perspective is important. As we regularly see in politics and protests, different groups have different points of view. In tax law, disputes between taxpayers and the IRS quite often stem from different perspectives on the law. Courts are called upon to adopt one or the other perspective in resolving the dispute.
In Robin J. Fowler v. Commissioner, 155 T.C. No. 7 (Sept. 9, 2020), Judge Greaves adopts a strongly taxpayer perspective of the law. He holds that even though the IRS rejected an e-filed return the return still triggered the 3-year limitation period on assessment. This elevates the taxpayer perspective on the importance of the limitation period over the IRS perspective on the importance of being able to process a return.
The decision may be a consequential one, both for taxpayers and the IRS. And not just because it's a fully reviewed opinion — a "we really mean it" opinion. It may be consequential because of its ripple effects. For example, will taxpayers whose e-filed returns are rejected now escape a late filing penalty if they either fail to resubmit or resubmit much later? Further, both the IRS and taxpayers will now need to figure out whether the Court’s opinion applies to all e-file rejections or just certain ones and, if so, which ones. Hello litigation.
If the IRS appeals the decision, a reviewing court may well take the IRS perspective. After all, the Supreme Court has said, more than once, that “limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the Government.” Bufferd v. Commissioner, 506 U.S. 523, 528 (1993). That perspective, however, raises its own set of problems. More on that below the fold.
This case involves a dispute over when a taxpayer first files a return. The Tax Court teaches several lessons here, both about returns and about filing, but the lesson I see as most important is about what constitutes a “return.”
Law: Filing Returns and The Assessment Limitation Period
Section 6501(a) says the IRS must assess “the amount of any tax imposed by this title...within 3 years after the return was filed” and defines return as “the return required to be filed by the taxpayer.” Once that three year period expires, so does any unassessed tax liability of the taxpayer. As I have written about many times, §6501 reflects a strong policy of closure: it is not just a statute of limitations, it is a statute of repose. See, e.g., Bryan Camp, Tax Return Preparer Fraud and the Assessment Limitation Period, 116 Tax Notes 687 (Aug. 20, 2007) (collecting cases, reviewing history of §6501(a)). Repose is central to a taxpayer’s perspective of what constitutes a return.
At bottom, a valid return is a document that contains sufficient information for the IRS to determine whether the identified taxpayer is reporting the proper tax liability. Aside from that snippet from §6501(a) I quote above, the Code does not define what constitutes a return. In the leading case of Beard v. Commissioner, 82 TC 766 (1984), aff’d, 793 F2d 139 (6th Cir 1986), the Tax Court synthesized the Supreme Court’s jurisprudence on this subject to find that whatever it is that a taxpayer submits to the IRS needs to meet four requirements to be a valid return: (1) it must contain “sufficient data to calculate tax liability”; (2) it must “purport to be a return”; (3) third, it must represent “an honest and reasonable attempt to satisfy the requirements of the tax law”; and (4) it must be signed under penalties of perjury.
The law on what constitutes a valid return generally takes an IRS perspective. Let’s look at each.
(1) Requirement of Sufficient Data
Taxpayers have to file documents that the IRS can process. That means that if the IRS runs into problems processing a return, taxpayers are under a duty to help fix the problem. That is part of what compliance means. For example, one of the cases relied upon by the Tax Court in Beard was Lucas v. Pilliod Lumber Co., 281 U.S. 245 (1930). In that case, the corporate taxpayer filed a tentative return, properly signed, on March 14, 1919. It then filed its corporate return on May 31, 1919, but that return was not signed. Nonetheless, the IRS kept the return and eventually, in 1923, it told the taxpayer about the problem on the return and asked that the taxpayer properly sign the return. The corporate officers replied they had lost their copy of the return but they submitted an affidavit that affirmed, under penalties of perjury, that the May 31, 1919 return was correct. About two years later, in October 1925, the IRS sent the taxpayers an NOD. The taxpayers cried too late! They said that one of the two 1919 returns was “the return” that kicked off the assessment limitations period. But the Supreme Court held that neither of the documents submitted in 1919 were valid returns. The first was not because it did not purport to be a return — it was a tentative return. The second was not because it was not signed. Thus, neither document sufficiently complied with the IRS requirements for making out a return. Only when the corporation effectively signed the return in 1923 did that document become the return for assessment limitation purposes. The Supreme Court said a taxpayer had the duty to show "meticulous compliance” with “all named conditions in order to secure the benefit of the limitation.” Id. at 248 (emphasis supplied). Pilliod is often cited as a signature requirement case. I see it equally as a duty to cooperate case. Notice that the IRS kept the originally filed document, even though it was defective, until the taxpayer fixed the problem.
Nowadays, most returns are filed electronically. And just as there are rules for filing paper returns, so are there rules for filing electronic returns. But taxpayers who file electronically must do so through third parties, called e-file Providers. An electronically-filed return involves the participation of multiple third parties, collectively called e-file Providers. They include include Electronic Return Originators, Intermediate Service Providers, Online Providers, Transmitters, Software Developers, and Reporting Agents. See Publication 3112 (e-file Provider Application and Participation).
So many the rules for proper electronic filing are aimed at EROs. See e.g. Publication 1345 (Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns) and Publication 4164 (Modernized e-File (MeF) Guide for Software Developers and Transmitters Processing Year 2020).
In order to help taxpayers and e-file Providers know whether they are complying with this first Beard requirement — sufficient data — the IRS electronic return processing system (called the Modernized e-File system, or MeF) flags certain data problems with e-filed returns. The MeF does this by using what are called “Business Rules” to “pinpoint the location of the error in the return and provide complete information in the acknowledgement file that is passed back to the transmitter. Under the current 1040 e-file program, one error code may apply to multiple types of e-file error conditions. MeF error codes use simple wording to clarify each error that triggers a rejection (atomic rules).” IRM 188.8.131.52.2.
A return that violates one of the Business Rules will trigger one of three different types of error codes. See Publication 4164 at p. 106. First, an Alert code tells the e-file provider and taxpayer about a condition they need to address, but the condition does not require the system to reject the return. Second, a Reject code identifies a problem that requires the taxpayer to resubmit the return “with the errors corrected” but “the system will continue processing the tax return to completion or until 100 errors have occurred.” Id. at 106. Third, a Reject and Stop code identifies an error so severe that the system cannot process the return until the error is fixed.
IRM 184.108.40.206.6 (11-22-2019) provides that when the system sends out a Reject or Reject-and-Stop code, if taxpayers fix the problem within 5 calendar days then the return will have been filed on the original day of transmission. Fixing an error is called “perfecting” a return. But, if an e-filed return “cannot be perfected and retransmitted due to rejection, the taxpayer must file a paper return. For that return to be considered timely, the paper return must be filed by the later of: The due date of the return [or] Ten calendar days after the date the IRS gives notification that it has rejected the electronic portion of the timely filed return.” Id.
This process for dealing with errors in e-filed returns mirrors the process followed in manual returns processing. See IRM 220.127.116.11.2 (01-01-2019) (General Correspondence Procedures).
(2) Requirement to Use the Proper Form
The second requirement is for taxpayers to use the forms prescribed by regulations and fill them out according to their instructions. The reason for this is also based on the IRS perspective: it must get the information in forms sufficient to administer the law to over 150 million individual taxpayers. Without the IRS’s ability to regulate the forms on which taxpayers report their taxes, the law would become unadministrable. That was recognized long, long ago when all returns were filed by paper. I like having students read Parker v. Commissioner, 365 F2d 792, 780 (8th Cir 1966) where the court said the taxpayer could not report tax information on a plain piece of paper, even when that method had been the taxpayer’s past practice and had been accepted by the IRS for many years. While the IRS had discretion to accept less than the required form, the court emphasized that “the Commissioner is certainly not required to accept any facsimile the taxpayer sees fit to submit. If the Commissioner were obligated to do so, the business of tax collecting would result in insurmountable confusion.” Id. at 780.
Using the proper form relates both to the first complete data requirement and the signature requirement. Basically, the IRS needs to know whom to assess. For example, in Bufferd v. Commissioner, 506 U.S. 523 (1993), the Supreme Court held that a return filed by an S Corporation could not start the limitations period for assessing the liability of an S corporation shareholder. There both the taxpayer and his S Corp filed timely returns. The IRS selected the taxpayer for audit and, as part of that process, he agreed to extend the limitation period. But the S. Corp. did not sign an extension. When the IRS eventually sent the NOD, the taxpayer argued it was too late because the proposed deficiency was based on an error in the S Corp’s return. The Supreme Court said that the S Corp. return was not sufficient to trigger the limitation period against the shareholder because even though the S Corp return contained information necessary to calculate the tax of the shareholder, it did not contain all the information necessary. Congress approved Bufferd by amending §6501(a) so that it now gives at least some shape to the definition of “return” as “the return required to be filed by the taxpayer and does not include a return of any person from whom the taxpayer has received any items of income, gain, loss, deduction or credit.”
(3) Good Faith Effort to Comply
You might think this is a taxpayer-perspective requirement. It is not. In In re Colsen, 446 F.3d 836, 840 (8th Cir. 2006) the great Judge Arnold said that this element was whether the IRS could actually make use of what the taxpayer submitted, not whether the taxpayer subjectively intended the document to be useful. There, the taxpayer had filed a return after the IRS had assessed him as a non-filer. The IRS argued that the return was filed too late to be an honest attempt to comply with the law. Judge Arnold rejected that argument, writing “the honesty and genuineness of the filer's attempt to satisfy the tax laws should be determined from the face of the form itself, not from the filer's delinquency or the reasons for it. The filer's subjective intent is irrelevant.” Because the IRS used the return to adjust the assessment, Judge Arnold found it was filed in a good faith effort to comply with the law. In contrast, said Judge Arnold, had the return added nothing to the IRS’s information, it would have failed this requirement, referring to In re Hindenlang, 164 F.3d 1029 (6th Cir. 1999) where the taxpayer’s return was not filed in good faith because it did not help the IRS accurately determine the tax liability.
A signature verifies the information on the return. It also is part of identifying the proper taxpayer. For example, the IRS will not accept an entity name in the signature block. The signature must be that of an actual human being. See discussion in Chief Counsel Advisory 201425011 (Feb. 21, 2014) (explaining why a partnership return with an entity partner’s name in the signature block was not a valid return).
Having obtained an extension, Mr. Fowler e-filed his 2013 return right on October 15, 2014. Actually, technically, Mr. Fowler authorized his CPA, who was an e-filing provider, to file the return on his behalf. The MeF system, however, identified a Business Rule violation that required fixing. It rejected the return, although the opinion was silent on whether the rejection was a “Reject” or a “Reject and Stop” code. The reason for the rejection was that the MeF system could not verify that the return was actually the return of Mr. Fowler. That is because Mr. Fowler’s identify had been stolen at some point in 2013 and the IRS had sent Mr. Fowler a special Identity Protection Personal Identification Number (IP PIN) to use when filing his 2013 return. For his protection, the system was designed to reject returns that were not accompanied by the IP PIN. He did not provide the IP PIN.
After receiving the rejection and learning the reason for it, Mr. Fowler’s CPA created a paper return and snail-mailed it to the proper Service Center where it was received on October 30, 2014. However, apparently that filing also did not contain the IP PIN because the IRS sent Mr. Fowler a letter in December 2014 that it had not received his 2013 return. Mr. Fowler then either found his IP PIN or got a new one and his CPA e-filed his return a third time on April 30, 2015.
The IRS selected the return for audit and issued an NOD on April 5, 2018. Mr. Fowler petitioned the Tax Court and moved to dismiss the case for lack of jurisdiction because the NOD was out of time. That NOD was out of time if Mr. Fowler had filed a return either on October 15, 2014 or on October 30, 2014.
Lesson: E-Filed Return Started Limitations Period Despite IRS Rejection
The IRS did not contest that Mr. Fowler had “filed” something on October 15th. Instead it asserted that what Mr. Fowler filed was not a “return” because he had failed to include the IP PIN.
Judge Greaves held that Mr. Fowler had filed a return sufficient to start the 3 year limitation period on October 15th. Accordingly, he did not reach the issue of whether the October 30th paper filing was a valid return.
Judge Greaves walks through the four Beard factors and quickly finds that what Mr. Fowler submitted on October 15th met the first three. First, it purported to be a return because it was an electronic version of the Form 1040. Second, it provided sufficient information necessary to calculate the tax because it “reported petitioner’s gross income, deductions, credits, and resulting next taxable income.” Third, it was an honest and reasonable attempt to comply with the tax law because, again, it contained all that information, along with supporting schedules. It was good faith because it was not a tax protestor return.
The fight came over the signature requirement. The IRS argued that there could not be a valid signature without the IP PIN. Judge Greaves rejected that argument, pointing out that the IRS “does not refer us to any form, regulation, or other taxpayer-directed guidance that defines an IP PIN as part of the signature.” Op. at 14. In order to be part of the signature requirement, Judge Greaves says, a taxpayer needs to know it! “An IP PIN does not become part of the signature requirement simply because respondent’s software will reject an efiled return without it.” Id.
Bottom Line: “We therefore hold that an IP PIN is not required to start the limitations period under section 6501(a).”
(1) Scope of Holding.
In one way, this is a narrow holding. It just concerns one specific Business Rule rejection by the MeF processing software, a failure to provide an IP PIN.
In another way, the opinion sweeps broad. First, it’s a reviewed opinion and unanimous. That may be because it is the first opinion (at least that I know of) to address the question of whether an e-filed return that is rejected — for any reason — constitutes a return for limitation period purposes.
Second, Judge Greave’s reasoning supports a broader reading of the holding: an error that causes the MeF to reject this return does not automatically mean a return fails the Beard test. Judge Greaves notes that not all the Business Rule errors implicate Beard. He writes that the MeF “rejects returns for errors that may not cause a return to fail the Beard test.” Op. at 14.
The potential broader sweep of this opinion may create problems for taxpayers and the IRS. There are lots of Business Rule rejection codes! Here’s a list you can find on TaxSlayer Website. Sure, the IRS could adopt Judge Greaves’ implicit invitation to “fix” this particular problem by now requiring taxpayers to use IP PINS as part of their signature. But what about all the other rejection codes? Which of them will “cause a return to fail the Beard test”?
(2) Point of View
The Tax Court here takes a robustly taxpayer perspective. From that perspective Mr. Fowler was a compliant taxpayer — not a tax protestor! — who repeatedly attempted to fulfill his reporting requirements. He kept giving the IRS the exact same dollars and cents information. Yet the IRS refused to take his return until he met their requirement that he give them a magic number, the IP PIN, which they never even sent him and which they did not really need because he used a return preparer.
I am not sure that all courts would take the taxpayer perspective here. First, a robustly taxpayer perspective undercuts both the Supreme Court’s teaching that Tax Code SOLs against the government are to be strictly construed, Bufferd, and its teaching that taxpayers must be “meticulous” in complying with their reporting obligations. Pilliod.
Second, the opinion undercuts the functional approach the Tax Court has taken in the past to determine whether a document is a return or not. Most of the cases Judge Greaves cites in the opinion are about Virgin Island cases where the issue is whether taxpayers who purport to be residents of the US Virgin Islands really qualify. Residency status determines filing obligation and the Court has had some fun times figuring that out, but has ended up with a pretty functional approach to applying Beard. See my discussion in Lesson From the Tax Court: Forms Follow Function in Return Filing, TaxProfBlog (Feb. 5, 2018).
Judge Greaves gives a fairly formalist read on the first Beard requirement. He focuses only on the fact that the return was not a tax protestor return but instead contained a numbers and supporting schedules. He concludes — a bit too quickly methinks — that the only relevant information for the first requirement is this kind of information.
I see the first Beard requirement in broader terms. Yes, the IRS can calculate the liability from the information on the return, but the IRS does not know whom to assess! That is, once Mr. Fowler’s identity was compromised, the IRS needs additional information from him that other taxpayers need not supply. And, obtaining an IP PIN does not appear onerous. As this IRS webpage explains: “Taxpayers who receive the annual IP PIN via mail but lose or fail to receive their CP01A Notice may use the Get an IP PIN tool to retrieve their number.” It sure does not seem to me that Mr. Fowler was "meticulous" in his compliance.
It seems the IRS Office of Chief Counsel did make some argument to this effect, but it appears to have tried to link the IP PIN to the signature requirement. I do not understand that. It seems a loser argument for the reasons Judge Greaves gives, the most important being that the IRS did not tell Mr. Fowler that the IP PIN was part of the required signature. It just told him it needed the IP PIN to process the return.
I would think the stronger argument is that the failure to provide the requested IP PIN caused the filing to fail the first Beard requirement for the reasons the IRS gave: the IRS needed assurance that the filed document was really Mr. Fowler’s return. I mean, the dude's identify had been compromised. Mr. Fowler would not be pleased to have the IRS process just any old return that purported to be from him.
Judge Greaves does not shirk away from the idea that the IRS really needed this information to authenticate the return. But his reasons for rejecting the IRS perspective are confusing.
First, he says that “internal IRS guidance has acknowledged that an element other than an e-signature may be needed to authenticate an electronic return.” That’s a head-scratcher for me. It seems to actually support the IRS position here! After all, the IP PIN is exactly “an element other than an e-signature” that the IRS is here saying it “needed to authenticate an electronic return.” So I just don’t see how that is a reason to reject the IRS’s argument that it really needed the IP PIN to make sure it did not process a return filed by a fraudster.
Second, Judge Greaves says the IRS does not really need the IP PIN because Mr. Fowler’s CPA was under a duty to verify Mr. Fowler’s identity. So the IP PIN requirement was “superfluous” he says. Perhaps Mr. Fowler's CPA was a stand-up guy, but the IRS has to deal with some 1.2 MILLION other return preparers. So any duty imposed on return preparers may be a pretty weak belt, from the IRS perspective. The IRS may well want a suspender as well. Redundancies in bulk processing are hardly superfluous given the intractable problems confronting the IRS in combating identify theft. For a primer, go read this TIGTA report. And even if reasonable minds disagree, I would think the IRS is in the better position to know what information it really needs than is the Tax Court.
Third, Judge Greaves says the onus is on the IRS to tell taxpayers how to comply with the signature requirement. That is incontrovertible, which again leads me to wonder who in IRS Office of Chief Counsel thought it was a great idea to link the IP PIN to the signature requirement. To me, it’s data that is absolutely necessary for the IRS to fulfill its statutory mandate of accurately assessing the proper tax against the proper taxpayer.
In short, the Court here took a very strong taxpayer perspective. After all, Mr. Fowler knew who he was! The IP PIN was indeed superfluous from his perspective. But if one looks at the matter from the IRS perspective, one might see it a different way. Given the potential impact of this case on returns processing and the uncertainty of which of the Business Rule rejection errors make a return invalid, it will be interesting to see whether the government takes an appeal on this case.
(3) The idea of Perfection
One possible problem with adopting an IRS perspective is one might think it gives too much control to the IRS to determine when what is filed is a "return." That is, there is no particular restraint on the IRS choosing what the MeF system rejects for "Business Rules." Those of a dystopian point of view will be suspicious of a rule that says any rejection code makes a return invalid.
But the IRS has long had a concept of perfection whereby when a taxpayer submits a defective document, the IRS can treat it as a tentative return and if the problems are fixed timely, then the original filing will be a "return." See Treas. Reg. 1.6011-1(b). The MeF rules, described above, continue this idea of "perfection" to allow taxpayers 5 days to fix an Reject code. Thus, a court might well adopt the IRS perspective here but then adopt a more expansive perfection rule.
Coda: Speaking of perspective, I turned 60 last Monday. Although I thus officially became a senior I can tell you that I am in no hurry to “graduate.” But the birthday did help me realize that I could not have written these posts 20 years ago. It turns out that age does help give one perspective. I find it ironic that one cannot learn that sooner. I wonder what I don’t know now that I will in 20 years?
Bryan Camp is the not yet senile George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each Monday for another Lesson From the Tax Court.