Lesson From The Tax Court: Counting The Days

Most people know that the IRS generally has three years to audit a return. Calculating the proper three-year period, however, requires close attention to both the start date and the end date.  You need to count those days properly.  I tried to drill into my students the practice of always consulting a calendar when attempting to calculate the proper dates.  Christian Renee Evert v. Commissioner, T.C. Memo. 2022-48 (May 9, 2022) (Judge Marshall), reinforces that teaching: to calculate the period in which the IRS can assess a tax, you need to properly count the days in the three year period.

Law: Calculating The Assessment Period Expiration Date (ASED)
We start with §6501(a) which says that “the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed)....”  Section 6072 tells us that the date prescribed for individual income tax returns is April 15th.   April 15th is also called the statutory due date, ‘cause it’s right there in the statute, doncha know.

But the statute does not really mean what it says.  The ASED does not always start on the date the taxpayer files their return.  Despite that parenthetical language in §6501(a), the ASED does indeed depend on whether the taxpayer has filed their return on or after the date prescribed, thanks to the interplay of three statutes: §6501(b)(1); §7503; and §7502.

First, early is on-time: §6501(b)(1).

Section 6501(b)(1) provides that any return “filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be considered as filed on such last day.”  It’s a deemer rule.

How does this affect the ASED?  It means that one ignores the actual date of filing for returns filed before the statutory due date.  Sorry, but anxious taxpayers cannot speed up the ASED by filing early.  Returns filed in February or March or anytime before April 15th are deemed filed on April 15th and it's that date that triggers the 3-year period.

Second, late is sometimes on-time: §7503.

Section 7503 provides that when the last day “for performing any act” falls on a Saturday, Sunday or legal holiday, then “the performance of such act shall be considered timely if it performed on the next succeeding day which is not a Saturday, Sunday, or a legal holiday.”  We all know what Saturdays and Sundays are, but the statute further instructs us that “for purposes of this section...the term “legal holiday” means a legal holiday in the District of Columbia.”  Don’t ask me why.  The official list of federal holidays is over in 5 U.S.C. §6103.  Perhaps those who wrote §7503 did not know that?  I would welcome any comments on why the statute makes “legal holiday” mean holidays in Washington D.C.

The reason it can be important is because D.C. has a local holiday called Emancipation Day.  On April 16, 1863, Abraham Lincoln signed the Emancipation Proclamation and immediately freed about 3,600 people in D.C.  In 2005, DC made that an official public holiday...in D.C.  Consistent with 5 U.S.C. §6103(b), when the 16th fall on a Saturday, the holiday is celebrated on Friday and when the 16th falls on Sunday, the holiday is celebrated on Monday.  Hey, we would not want to waste a good holiday on the weekend, right?

How does all this affect the ASED?  It doesn’t!  And that’s what's tricky.  Section 7503 does not change the statutory due date, nor is it a deemer rule like §6501(b)(1).  When a taxpayer’s return is timely because of §7503, that is not because the return is deemed filed on the statutory due date.  It’s filed when it’s filed!  All §7503 does is make the filing timely.  The Tax Court says that the point of §7503 is to cut taxpayers a break when the due date falls on a day when IRS offices are closed and IRS employees won’t be at work.  Again, it does not change the statutory due date, it just excuses the late filing. See Winkler v. Commissioner, 56 T.C. 844, 847 (1971).  The IRS agrees, writing:

“The purpose of section 7503 is to extend the time for filing a document when the last day for filing the document would be a Saturday, Sunday, or legal holiday. Section 7503 does not change the date prescribed for performing an act, nor does it provide that an act performed on the day following a Saturday, Sunday, or legal holiday will be deemed to have been performed on the actual due date.”

Rev Rul 81-269.  The Rev. Rul.’s reasoning applies as well to other types of extensions, such as those granted to individual taxpayers in response to a Form 4868 or granted to groups of taxpayers under the Service’s authority in §7508A.  Those extensions allow taxpayers to avoid penalties for late filing, but do not alter the statutory due date and, thus, do not trigger the “early is deemed on-time” rule in §6501(b)(1). See Estate of Mitchell v. Commissioner, 103 T.C. 520, 523 (1994), aff’d in relevant part, 250 F.3d 696 (9th Cir. 2001).  There the IRS gave taxpayer an extension of time to file and taxpayer mailed return before the end date of the extension and the return was received on the last day of the extension.  The Court held that §7503 did not apply and the ASED started running from end date of the extension, and not from the earlier date when the Estate’s return was mailed.

Let's see if I can give an example without messing up.  Say April 15th falls on a Sunday.  In that case §7503 allows returns filed on Tuesday the 17th to be treated as timely filed (remember the 16th is Emancipation Day).  But that does not change the statutory due date.  Thus, a taxpayer who files their return on Monday the 16th is timely, even though filing after the statutory due date.  Similarly, a taxpayer who files on Tuesday the 17th files timely.  But neither filing gets the §6501(b)(1) deemer rule because neither is filed on or before the statutory due date of April 15th.  Thus, the ASED in each case ends three years after the day the return is actually filed (the 16th or 17th).  Burnet v Willingham Loan & Trust Co, 282 US 437 (1931) (a great short rumination on the nature of time by the sainted Justice O.W. Holmes).

Ok.  If I messed that up, please tell me in the chat.  But be kind!

Note, however, that the while §7503 does not alter calculation of the ASED it does alter the calculation of the §6511(b)(2)(A) 2 or 3 year lookback rule for refund claims.  See Lesson From The Tax Court: The Refund Lookback Period Trap  TaxProf Blog (Aug. 23, 2021).

Third, late is sometimes early, and so is sometimes on-time! §7502, §6501(b)(1).

Ugh. This is weird.  Hang in there.  Sometimes a late-filed return will be deemed an early-filed return and, then, thanks to §6501(b)(1), will be deemed to have been filed on time.  I call this the double-deemer rule, or “Deemer, Deemer” as Mork might say (instead of Nanu, Nanu) if he had come to Earth as a tax practitioner.

The trouble is that §6501 does not define the word “filed."  So we go to case law, which establishes the general rule that returns are filed when they are received in the proper office for processing them.  That’s called the physical delivery rule.  See Bongam v. Commissioner, 146 T.C. 52 (2016).  Some courts stretch that concept, such as the recent case of Seaview Trading, LLC v. Commissioner, --- F.4^th --- (9^th Cir. 2022) (return was filed when taxpayer gave a copy to IRS employee whose job was to collect delinquent returns although not to process them).  You can find a good discussion of that case on this Procedurally Taxing Blog Post.  And your return may be deemed filed even if the IRS rejects the first attempt.  See Lesson From The Tax Court: Taxpayer 'Filed' Return Even Though IRS Could Not Process It, TaxProf Blog (Dec. 6, 2021).  If you file by mail, you can request a return receipt that shows the date of receipt.

Bottom line: if the return was physically received on or before the statutory due date, then §6501(b)(1) deems the return to have been filed exactly on the statutory due date.  See also Treas. Reg. 6501(b)-1(a). No need for further analysis.

If, however, the return was physically received after the statutory due date, you do need further analysis.  That is because §7502(a)(1) provides that when a document is received late, then “the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery...” but only if “the postmark date falls within the prescribed period or on or before the prescribed date.. ”  §7502(a)(2)(A).

Yes folks, this is the famous “Mailbox Rule” that I have blogged about multiple times, most recently in Lesson From The Tax Court: A Timely Lesson For Filing Returns, TaxProf Blog (May 17, 2021).  Today’s lesson is not a mailbox rule lesson, however.  Whew!

The point here is that if the mailbox rule applies, then you get the double deemer.  That is, the date of filing will be the statutory due date, regardless of the actual date of mailing.  That is because the mailbox rule first deems the return filed on the day of mailing, but then comes §6501(b)(1) and deems the now early-filed return as being filed on the statutory due date.  So once again it is the statutory due date that triggers the 3-year period to calculate the ASED.

But remember, the mailbox rule is a rescue rule.  It does not apply if the taxpayer’s filing is timely.  For example, when the taxpayer gets an extension of time to file and the return is received by the IRS before the last day of that extension, the ASED starts on the day the return is received and not the day it was mailed. See First Charter Fin. Corp. v. United States, 669 F.2d 1342, 1346–1347 (9th Cir.1982).

Let’s look at two examples to see how the double deemer works and does not work.

Example 1: April 15th falls on a Saturday, the taxpayer properly mails their return on Friday the 14th, and the IRS receives the return on Wednesday the 19th.  Section 7502 first deems the return to have been filed on April 14th.  That’s early.  So §6501(b)(1) then deems that early filed return to have been filed on the statutory due date.  Deemer Deemer.  The ASED period is triggered by April 15th.

Example 2: Same facts only the IRS receives the return on Monday the 17th.  Now the return is not late, thanks to the extension given by §7503 (if you don’t see that, go re-read above analysis).  But because the return is not late, the mailbox rule does not apply.  No deemed mailing-as-filing.  And remember that §7503 does not alter the statutory due date.  So the return is filed after the statutory due date and does not get the early-deemed-timely rule either.  Thus it is Monday the 17th that triggers the 3-year period to calculate the ASED.   See Rev. Rul. 81-89.

Law:  Extending the ASED.

Assessments made after the ASED are void.  See Parsons Corp. v. United States, 659 F. Supp. 48 (C.D. Cal. 1987) (illegal assessments are void and not merely voidable).  There are two common ways that the IRS extends the ASED.

First, it sends out an NOD.  For Income, Estate, and Gift taxes, the IRS may not assess a deficiency it finds until it sends the taxpayer a Notice of Deficiency (NOD) which then permits the taxpayer to seek pre-assessment review in Tax Court.  §6212, §6213.  It is not surprising, therefore, that sending out the NOD will toll the assessment period until after the taxpayer either fails to file a Tax Court petition or the decision of the Tax Court becomes final. §6503(a).

Second, it asks for consent.  When a taxpayer’s return is under audit and time is running out on the ASED---but the IRS has not completed the examination---the IRS employee working the case may ask the taxpayer to extend the ASED for a set amount of time, using Form 872.  The IRM says extensions should not be requested as a matter of routine, but only under certain circumstances.  One of those is when “examination will expire within 180 days and there is insufficient time to complete the examination and the administrative processing of the case.”  IRM 25.6.22.2.1 (11-17-2021).  Further the IRM instructs Exam employees to offer opportunities for non-docketed protests to Appeals only when there are “at least 365 days remaining on the statute of limitations when the case is received by Appeals.”  Id.

When the IRS seeks the taxpayer’s consent to extend the ASED, it sends the taxpayer a letter explaining the reason for the request, a Form 872 to fill out, and IRS Publication 1035 which is a four-page pamphlet that explains the taxpayer’s options.  There are different versions of Form 872, but all of them serve the same purpose: to extend the ASED by agreement.

As with all other types of agreements, the Form 872 will not be a valid extension if the taxpayer was forced to sign the Form under duress.  The Tax Court has long permitted taxpayers to attack the validity of extensions on the basis of duress.  Diescher v. Commissioner, 18 B.T.A. 353 (1929)(finding that the parties “were not dealing with each other at arm’s length” and that the taxpayer “was not acting with a free will, but was coerced by” the IRS).  Once the IRS shows the Tax Court a facially valid Form 872, the taxpayer carries the burden to show why it is invalid, such as showing duress. Id.

Judge Marshall gives this great summary of what is and is not duress:

“We have also held that actions that deprive another of her freedom of will are distinguishable from legally authorized actions that merely limit another to choose between options that are not desirable. Hence, it is not duress when the Commissioner makes statements informing a taxpayer that lawful means to assess and collect the tax will be used. Accordingly, we have held that a taxpayer did not sign a consent under duress when the Commissioner told the taxpayer that an opportunity for an IRS Appeals conference would not be allowed if the taxpayer failed to sign a consent.” Op. at 7 (quotes and citations omitted).

Facts

Ms. Evert timely filed her return for tax year 2015.  The opinion is silent on what made it timely. I’ll come back to that.

At a time not given in the opinion the IRS selected her 2015 return for audit and apparently concluded the audit quickly because the first date we get in the opinion’s statement of facts is that “on April 23, 2018, petitioner’s IRS Appeals case was assigned” to an Appeals Officer (AO).  Working backwards we can assume that the assignment likely occurred about three months after Ms. Evert asked for an Appeals conference.  That was the average time for Exam to transfer a protest to Appeals, according to this 2018 GAO study (see p. 2).  If that is true then at the time Ms. Evert requested an Appeals review, there remained more than 365 days until the ASED.

The AO sent out the initial contact letter the same day and worked with Ms. Evert during May, June and July.  Ms. Evert communicating and kept promising additional information and apparently provided some.  On August 2^nd, with about 256 days remaining until the ASED, the AO asked Ms. Evert’s consent to extend the ASED by sending her the standard package of the request letter, the Form 872, and the IRS publication.

Ms. Evert signed and returned the Form 872, agreeing to extend the ASED until April 15, 2020.  After that, it is not clear what, if anything, happened.  The opinion says only that “AO Mack continued to provide petitioner with the opportunity to present her positions and supporting documents in IRS Appeals for several months.”  Op. at 5.  The opinion does not say whether Ms. Evert took advantage of the opportunities.

On April 17, 2019, the AO issued an NOD.  Ms. Evert timely filed a Tax Court petition.

Lesson: Counting The Days

Ms. Evert raised two issues: (1) the NOD was issued after the ASED had passed; and (2) her Form 872 consent was invalid because it had been signed under duress.  Both issues involve counting the days.

Issue 1: Was the NOD Untimely (Absent the Consent)?

Remember that the opinion says only that Ms. Evert timely filed her 2015 return.  It does not explain why the return was timely.  That might matter because when you look at the calendar for that year, you see that April 15th was a Friday.  That means it was Emancipation Day in D.C. and so, thanks to §7503, returns filed on Monday April 18th would be timely.

On the one hand, that means that for returns filed on Monday, you would count that day, Monday the 18th, as triggering the 3-year assessment period.  Ms. Evert might have mailed her return on Saturday the 16th in which case she would get the timely-mailing-is-timely filing rule.  But it would be Monday the 18th that started the ASED, which means the April 17, 2019 NOD would be timely.  The IRS would not need to rely on the validity of the Form 872 consent to extend the limitation period.

On the other hand, the IRS Chief Counsel attorney conceded this issue!  Judge Marshall wrote: “the parties agree that ... the three-year limitations period ... would have expired before the date on which respondent mailed the notice of deficiency for tax year 2015.” Op. at 6. We can assume from that concession that Ms. Evert filed her 2015 return before April 15, 2016 and so received the §6501(a)(1) early return deemer rule.  Or perhaps she properly mailed the return on or before April 15th and it was received by the IRS after Monday April 17th thus giving her the double deemer rules.  Either way, the ASED would be April 15, 2019 and the NOD was untimely.  Rev. Rul. 81-89.

Ya gotta count the days.

Issue 2: Was the Consent Valid?

Ms. Evert’s duress argument was a stretch.  She testified that the AO pressured her into signing the Form 872.  The AO testified that he did not do so.  Judge Marshall believed the AO for reasons she gives in the opinion.

In this case, the objective facts supported the AO’s testimony.  The most important fact again has to do with counting days. When the Tax Court has found duress, it sometimes appears important that the consent was sought when only a few days were left until the ASED.  Robertson v. Commissioner, T.C. Memo. 1973-205.  That fact made a taxpayer’s claim of being unduly pressured much more plausible.

In this case, however, more than 240 days remained when the AO sent the request to consent to extend the ASED.  There was no reason at all to pressure Ms. Evert because if she had refused the AO had plenty of time to simply issue the NOD using the information at hand.  In fact, at that time, Ms. Evert’s case was not even at the 180-day mark when it would be put into an red folder and become priority workflow.  IRM 8.21.1.4 (04-12-2019).  That objective fact made Ms. Evert’s testimony less plausible and the AO’s testimony more plausible.

Ya gotta count the days.

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  You can count the days until another Lesson From The Tax Court appears, as it comes around on TaxProf Blog each Monday....unless that Monday i8s a Holiday in which case it Tuesday is deemed Monday!  So next week it will not appear on Monday, Memorial Day, but will instead appear on Tuesday.