Case law gets made when things go wrong. When things go right, a taxpayer will file a return, the IRS will process the return, and the taxpayer will receive any claimed overpayment as a refund. Today's lesson arises from a breakdown between filing and processing. It teaches us the difference between those concepts.
In James Forrest Willetts v. Commissioner, T.C. Sum. Op. 2021-39 (Nov. 22, 2021) (Judge Kerrigan), the taxpayer sought refund of an overpayment on the basis of a Form 1040 the IRS had refused to accept for processing because of concerns about identify theft. The IRS was not sure whether the return was genuine. By the time the taxpayer demonstrated the genuineness of the Form 1040, it was too late to get the refund unless the taxpayer’s submission of the rejected Form 1040 constituted the “filing” of a “return.” The Tax Court framed the question as follows: “whether the Form 1040 petitioner mailed...constitutes a properly filed return.” Op. at 5. But do you see there are two questions presented in this framing? First, did the rejected Form 1040 qualify as a “return.” The Court said yes. Second, was the rejected Form 1040 “filed” when the IRS could not process the Form? Again, the Court said yes.
The holdings in this non-precedential opinion are consistent with the recent Tax Court precedential opinion Fowler v. Commissioner, 155 T.C. No. 7 (2020), curiously uncited by Judge Kerrigan. Fowler held a taxpayer had validly filed electronically even though the taxpayer had not supplied his Identify Protector Taxpayer Identification Number (IP-TIN) and thus the IRS could not process the return because, as in today’s case, it did not know who had submitted the return.
In this age of computer processing, especially as taxpayers and the IRS wrestle with such issues as identify theft and the complications created by COVID regarding return filing requirements, discerning whether and when a taxpayer “files” a document that qualifies as a “return” becomes all the more critical. This Lesson helps us understand the issues at play. Details below the fold.
Facts of the Case
At some point before April 15, 2015, Mr. Willitts properly requested an automatic extension to file his 2014 tax return to October 15, 2015. At the same time, Mr. Willitts paid an additional $8,000 in estimated taxes. That brought his total tax payments to just under $15,100 as of April 15, 2015, per §6513(a).
On May 2, 2018, the IRS finally received Mr. Willitts’ paper 2014 return. The return reported a liability for the year of less than his payments and asked for a refund. But the IRS did not process the return because it was not sure that the return was really from Mr. Willitts. IRS records showed that Mr. Willitts identity had been compromised. The IRS did not want to send a refund to the wrong person. So it sent Mr. Willitts a letter asking for more information to resolve the identity issue. Mr. Willitts made no response, possibly because he never received the letter or possibility because he did not understand it or possibly because life got in the way. The opinion does not say.
On July 29, 2019, with no return processed, the IRS’s automated underreporter system flagged Mr. Willitts as a non-filer for 2014 and sent out an NOD proposing a tax liability of just over $17,000. He got the NOD and, in response, sent in a copy of the Form 1040 he had previously mailed. He also petitioned the Tax Court.
The IRS used the information on that copy to adjust his tax liability down to about $13,500. Since he had paid $15,000, that left him having paid $1,500 more than the now adjusted tax liability. He wanted that money back! The IRS said he was out of time because he had never filed a 2014 return. What he had mailed to the IRS in May 2018 had been rejected. That was the issue before the Court.
Law: Claims For Refunds
When a taxpayer believes they have overpaid their taxes, they must file a claim for refund with the IRS to get it back. Otherwise, the overpayment just sits there. To file a successful claim for refund, the taxpayer must pay attention to two requirements. First, the taxpayer must timely file the claim for refund. §6511(a). Second, the claim must relate to some identified overpayment made within the allowable lookback period, either two years from the last payment or three years from the return filing date. §6511(b).
While this case presents no §6511(b) issue, you must always be aware that vicious little statute. See Lesson From The Tax Court: The Cost of Inattention, TaxProf Blog (August 24, 2020). For today's Lesson you just need to remember two points. First, a claim for refund that is not tied to a validly filed return can only reach back two years. Second, a claim for refund that is tied to a validly filed return can reach back three years, plus “the period of any extension of time for filing the return.” §6011(b(2)(A). (Note to self: if unable to timely file a return, always get the automatic six-month extension.)
Section 6511(a) provides that a taxpayer’s claim for refund is timely if it is filed either (1) within three years after the return to which it relates was filed (the 3-year rule), or (2) within two years after the claimed overpayment was made (the 2-year rule).
Thus, to calculate whether a taxpayer’s refund claim is timely filed, you need to know (1) when the claim for refund was filed, and (2) which timing rule applies/
In this Lesson there was no dispute about when the claim for refund was filed. Form 1040 was Mr. Willitts’ claim for refund. The regulations say a claim for refund can be made on either the relevant original return (Form 1040 for individuals) or the relevant amended return (Form 1040X for individuals). See Treas.Reg. 301.6402-3(a)(1), (2). And the IRS did physically receive his paper Form 1040 on May 2, 2018. Normally, the physical delivery to the proper office is sufficient for a document to be filed. See Bongam v. Commissioner, 146 T.C. 52 (2016). We call that the physical delivery rule. There is no need here to resort to the mailbox rule. Cf. Lesson From The Tax Court: A Timely Lesson For Filing Returns, TaxProf Blog (May 17, 2021).
The controversy in today’s Lesson comes in trying to figure out whether Mr. Willitts’ claim for refund was timely. Look again at the facts to see the issue in this case. All of Mr. Willitts' payments were made as of April 15, 2015. Thus, if he had never filed a return, only a claim for refund filed on or before April 15, 2017 would be timely. Thus his May 2, 2018 claim for refund would be untimely. No refund.
However, if that document was ALSO a valid return, then the included refund claim would not only be timely (simultaneous!) but the return would also trigger the 3-year lookback and so would now reach back to the April 15, 2015 payments, thanks to the six-month extension. (Reminder note to self: always ask for the extension).
Thus Judge Kerrigan was asked to determine whether the submission of a rejected Form 1040 was the filing of a return sufficient to trigger the 3-year rule in §6511(a). That involves the same two inquiries as determining when a claim for refund was filed: what constitutes a “return” and when was it “filed.” She answered both questions (even though the IRS did not argue the first one), so we get two lessons.
Lesson 1: Rejected Form 1040 Can Still Be a “Return”
Generally, what constitutes a return for purposes of triggering the 3-year statute of limitations (SOL) on assessment in §6501(a) is also sufficient to trigger the 3-year rule for refund claims. For example, a return which is filed early is deemed filed on the due date for both purposes. §6501(b)(1), §6513(a). Similarly, a late-filed return will trigger both 3-year periods. Omohundro v. U.S., 300 F.3d 1065 (9th Cir. 2002).
Courts generally take a highly practical approach to deciding whether a particular document filed by the taxpayer is a return. The leading remains Beard v. Commissioner, 82 TC 766 (1984), aff’d, 793 F2d 139 (6th Cir 1986). There, the Court developed the following framework to decide when a document qualifies as a return: (1) the document must contain sufficient data to calculate tax liability; (2) it must purport to be a return; (3) 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 Beard Court supported its practical framework with various Supreme Court precedents. The most relevant for today is Commissioner v. Lane-Wells Co., 321 US 219, 223 (1944). There, the corporate taxpayer filed its corporate tax returns but when audited, the IRS determined the corporation was actually a personal holding corporation, thus making it subject to separate taxes which should have been reported on a separate return. By the time the IRS figured that out, however, the assessment SOL had passed, but only if the original corporate return was sufficient to trigger the assessment limitations period.
The taxpayer argued that the corporate tax return contained all the information the IRS needed to compute the personal holding company tax and so was sufficient to trigger the assessment limitations period. It relied on Germantown Trust Co. v. Commissioner, 309 U.S. 304, where the taxpayer had used the wrong form but the return had contained “all of the data from which a tax could be computed and assessed although it did not purport to state any amount due as tax,” 309 U.S. at 308.
In rejecting Lane-Wells’ argument, the Supreme Court said: “the purpose [of a return] is not alone to get tax information in some form but also to get it with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished.” (emphasis supplied).
Using the practical Beard framework, the courts apply what you might call a “substantial compliance” doctrine. That is, even if what is filed with the IRS is not completely perfect, it can constitute a return if it serves the purpose of a return: to permit the “task of handling and verifying returns” to be “readily accomplished.” For example, in Blount v. Commissioner, 86 T.C. 383 (1986) the taxpayers mailed their paper Form 1040 but neglected to attach Mr. Blount’s W-2. The IRS sent the return back to the taxpayers with instructions to re-submit and attach the missing W–2. They did so. The Court held that the initial document sent to the IRS qualified as a return, because the original filing contained sufficient information to calculate the tax. The later-submitted W–2 was just substantiated the information contained in the original filing.
The IRS follows Blount. In SCA 200010046 (Jan. 12, 2000) the question was whether a return filed but missing Schedule A was a valid return. Chief Counsel applied the substantial compliance doctrine to conclude that “an otherwise complete return which lacks a required form or schedule is sufficient to start the statute of limitations on assessment” when the document submitted is facially sufficient to permit the IRS to compute a tax liability.
In this Lesson, the IRS does not appear to have argued that Mr. Willitts’ Form 1040 was not a return. Judge Kerrigan thus basically quickly disposes of that issue and moves on to address what the IRS did argue: that the Form 1040 was not “filed” because it was rejected.
Lesson 2: Unprocessable Return Is Nonetheless Filed Upon Receipt
Judge Kerrigan also easily finds that Mr. Willitts filed his return because he put it in the mail and got it to the proper office on May 2, 2018.
The IRS argued that a return cannot be considered filed until such time as the IRS is able to verify the signature. Here, it was unsure that the May 2, 2018 return was actually submitted by Mr. Willitts and not some fraudster. Judge Kerrigan rejects that argument with an ipsi dixit: “A valid return is deemed filed on the day it is delivered, regardless of whether it is accepted by the Commissioner.” She cites to Blount, supra, for authority.
There is actually a lot to unpack in Judge Kerrigan’s simple declarative sentence. It is curious that she ignores Fowler here, a case that seems more on point than Blount. More on that in the Comments. The bottom line lesson here is that just because the IRS cannot process a document does not mean that the document is not a return, nor does it mean the document was not filed.
Comment: The Difference Between Filing and Processing
When the IRS receives a return—whether in paper or electronic format—it must take the information contained in it and put that information into the IRS’s computerized records systems. That’s called processing and IRM Part 3 explains how the IRS does it. Processing is done both by humans and computers whether the return is filed electronically or on paper. But there are differences. Paper returns are input into the computers either by scanners or human fingers. If there are problems, the IRS will initiate snail mail correspondence with the taxpayer to resolve them. IRM 18.104.22.168.2. Electronic returns, however, are treated differently because the IRS computers receiving the electronic returns can quickly identify errors that make it impossible to properly put the information into the IRS computers. And the computers initiate electronic communications by sending rejection codes. For details, see Lesson From The Tax Court: Rejected e-Filed Return Starts SOL On Assessment, TaxProf Blog (Sept. 14, 2020).
The concepts of filing and of processing largely overlap, but are nonetheless separate.
On the one hand, just because the IRS is able to process a document does not mean the taxpayer filed the return. The return must have been filed by the taxpayer.
A good recent example is Coffey v. Commissioner, 987 F.3d 808 (8th Cir. 2021), reversing T.C. 150 T.C. 60 (2018). In Coffey, the taxpayers filed their returns with the Virgin Islands Bureau of Internal Revenue (VIBIR) which then, following a standard procedure, sent the first two pages of the return to the IRS. The IRS processed those two pages and later audited the taxpayers. The Tax Court (over Judge Marvel’s dissent) held that the taxpayers’ return was filed with the IRS when it received the two pages from the VIBR. The Eighth Circuit reversed, very much along the lines of Judge Marvel's dissent. It held that just because “the IRS actually received the documents, processed and audited them, and issued deficiency notices...did not create a filing.” Id. at 813. Filing is a duty of the taxpayer and thus must be measured by the actions of the taxpayer.
I find it instructive that the Eighth Circuit relied in part on the very same quote from the Lane-Wells decision that I quote above. It’s the taxpayer’s duty to not simply provide information, but to provide it “with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished.” (emphasis still added—are you getting the idea why?) The Eighth Circuit emphasized that the taxpayer’s duty means the taxpayer must “meticulously” follow filing instructions.
On the other hand, just because the IRS is unable to process what the taxpayer sends in does not mean the taxpayer has failed to file. Again, filing is the act of the taxpayer. Processing is the act of the IRS.
A good example is Fowler v. Commissioner, 155 T.C. No. 7 (Sep. 9, 2020). This is the case that seems to be much more on point to this Lesson.
Fowler is similar to this Lesson’s case because both taxpayers submitted a return and the IRS was unable to verify the taxpayers' identity. Fowler is different only in that there the taxpayer had e-filed. The IRS had tagged the taxpayer as a victim of identity theft and had issued an Identify Protection Personal Identification Number (IP-PIN). But the taxpayer did not include that on the e-filed return. The computer system rejected the return and sent an error code to Mr. Fowler’s electronic return originator that Mr. Fowler needed to provide an IP-PIN in order for the IRS to process the return. Eventually....much, much, later just like here....the taxpayer provided that information. The IRS then processed the return. After a later audit, the resulting NOD was issued more than three years after the initial, rejected, submission, but less than three years after the taxpayer had provided the IP-PIN.
The Tax Court held the IRS had blown the assessment limitations period because Mr. Fowler's first, rejected, submission was the filing of a return that triggered the assessment SOL. The central debate was about whether the taxpayer had filed a “return.” That required deciding whether the taxpayer had complied with the signature requirement. The Court held that the failure to include an IP-PIN did not matter because there was “no taxpayer-directed guidance that defines an IP PIN as part of the signature.” While there were some IRM provisions that instructed IRS personnel to reject an e-filed return without an IP-PIN, the Court wrote that an “IP PIN does not become part of the signature requirement simply because respondent’s software will reject an efiled return without it.”
The Fowler opinion analyzed the signature requirement as part of its holding that the e-filed return qualified as a “return” even though not processable. However, the same reasoning flowed into its holding that Mr. Fowler had “filed” the return by submitting it electronically, even though it was not processable. The opinion even cites to Blount for the same proposition for which Judge Kerrigan cites that case in Willitts: a document that qualifies as a return is “filed” upon delivery, even if the IRS does not accept or process the document.
In short, if the taxpayer “meticulously” follows applicable guidance, the taxpayer will have “filed” when the taxpayer properly submits the return, either on paper or electronically. But it does need to be submitted to the proper “office.” That does not yet appear to make a difference for electronic submissions but it can make a difference for paper submissions. For example, when the taxpayers sent their return to the wrong IRS Service Center, their return was not filed until that Service Center discovered the error and sent the return to the correct Service Center. Winnett v. Commissioner, 96 T.C. 802 (1991).
Comment 2: Slouching Towards Perfection?
When I blogged on Fowler, I commented that its holding left the IRS in a bind. The IRS is unable to process returns for a bunch of different reasons. Sometimes the IRS rejects processing a document because the document does not qualify as a return. That is the initial position the IRS took in Fowler. The Tax Court’s decision there could very well shorten the assessment SOL for a period when the IRS was rendered blind by its inability to process the taxpayer’s information into its system.
Since then I’ve read Judge Lauber’s opinion in Reifler v. Commissioner, T.C. Memo. 2015-199 (2015). It provides a way to limit this Tax Court trend in Fowler, Blount, and now Willitts and to reconcile the tension in the concept of filing an unprocessable “return.” It’s the idea of perfection.
In Reifler, the taxpayer had failed to provide a required signature on the initial submission but later fixed that problem. Much later. Too much later as it turns out. The taxpayer tried to rely on Blount (and another case) for the proposition that later correction of errors would make the original submission valid. Judge Lauber rejected that idea noting that in both Blount and the other case, the taxpayers had promptly sent the requested information back to the IRS within the time period requested by the IRS. In short, by acting timely they had perfected the original documents such that the corrections could relate back. But the taxpayer in Reifler had not acted timely.
The IRS incorporates this idea in the IRM by holding off on imposing failure to file penalties if a rejected return is “perfected” within a certain time period. IRM 22.214.171.124.6. While one might disagree with the short time period the IRM allows (5 business days!) the idea seems sound: if the reason the IRS cannot process a document as a return is from a concern that the return is not really what it purports to be, taxpayers should have a reasonable period of time to cure the problem and have that cure relate back to the date of filing. Past that reasonable time, however, they will need to re-file.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each week to TaxProf Blog for another Lesson From The Tax Court.