In September of 2020 we discussed issues that arose in the case of Fowler v. Commissioner, 155 TC No. 7, when the IRS rejected an electronically filed return due to the lack of inclusion of an identity protection PIN on the return and its effect on the date a return was treated as filed for statute of limitations purposes.[1] In that case the Court ruled that the IRS had attempted to assess tax more than 3 years after the date the taxpayer initially attempted to file the return, and thus the IRS had failed to act in time.

In this case,[2] the IRS is now asserting the taxpayer had failed to file a return within the three-year period that began on the original filing date including extensions for filing, thus the taxpayers could not obtain the refund shown on the return that they filed within that time period, but which the IRS had rejected due to a suspicion that the return may have been the result of identity theft.

The Tax Court provided the following summary of the taxpayer’s initial lack of filing of a 2014 return, followed by the taxpayer’s later response to an IRS notice on the issue:

Petitioner timely filed a request for an extension of time to file his 2014 Federal income tax return, extending the due date from April 15, 2015, to October 15, 2015. Along with the extension request filing, petitioner submitted a payment of $8,000 for his 2014 tax liability. Petitioner did not file a return by the extended October 15, 2015, due date.

Petitioner mailed Form 1040, U.S. Individual Income Tax Return, to respondent on April 14, 2018.[3]

Since April 14, 2018 was well within the 3 year time period from the extended due date of October 15, 2015, it would appear the taxpayer had timely requested the refund of taxes claimed on that return.

But the IRS was concerned that the return filing might be the result of identity theft, so the following next occurred:

Respondent documented a Form 1040 for 2014 in his internal records on May 2, 2018, but rejected it as a return because of potential identity theft.

Respondent notified petitioner by letter that his Form 1040 was rejected because of concerns about potential identity theft. Petitioner did not submit to respondent any documentation disputing the potential identity theft; and it is unclear whether petitioner was aware of the issue or the rejection of his Form 1040 before commencing this case.[4]

The next action in this case was taken by the IRS in July of 2019, well after the 3-year period had expired for the filing of a claim for the overpaid tax:

On July 29, 2019, respondent’s automated underreporter unit issued to petitioner a notice of deficiency (notice) with regard to his 2014 tax liability; the notice also indicated that petitioner had not filed a return for 2014. After receiving the notice, petitioner submitted a copy of a Form 1040 for 2014, which respondent accepted insofar as it reports adjusted gross income.[5]

The IRS position is that the original filing in 2018 was not properly filed, thus the taxpayer had not filed a proper return before the three-year statute expired in October of 2018.

The Tax Court opinion explains the provisions in the law that set the final date for filing a claim for refund of that overpaid tax:

Pursuant to section 6402, in the event of an overpayment, a taxpayer may recoup the balance of the overpayment — less any outstanding liabilities — in the form of a credit or a refund. To receive a credit or a refund for an overpayment, section 6511(b)(1) provides that the taxpayer must file a claim within the period of limitation set forth in section 6511(a). A claim may be embedded within a tax return, in which case filing of the return and the claim are concurrent. Sec. 301.6402-3(a)(5), Proced. & Admin. Regs. Section 6511(a) specifies that the taxpayer must submit a claim by the later of: (1) three years from the time the relevant return is filed, or (2) two years from the time the tax was paid.

For the purposes of section 6511(a) the three-year period of limitation begins on the filing due date, including extensions for filing, of the relevant return. If the taxpayer files a return within this three-year period, then a claim filed within the same period is timely, regardless of whether the return was timely filed. Weisbart v. U.S. Dep’t of Treasury, 222 F.3d 93, 95 (2d Cir. 2000) (“[A] timely filed return is no longer required in order to satisfy the three-year deadline of section 6511(a).”).[6]

Applying those rules to this case, the Court notes:

The filing due date for petitioner’s 2014 return was October 15, 2015. Therefore, petitioner is entitled to a credit or refund for an overpayment so long as he filed his 2014 return and claim by October 15, 2018.[7]

If that initial filing is treated as a proper filing for purposes of claiming the refund, then the taxpayer has filed on time. Conversely, if the IRS rejection of the return due to suspicion of identity theft and the taxpayer’s failure to respond invalidate that first return, then the taxpayer has filed too late.

The Tax Court notes that the key issue is if the return was properly submitted, since the IRS did not argue that the Form 1040 that was submitted was itself insufficient to establish the claim for refund:

To determine whether a return was properly filed, the submitted document needs to be a required return that the taxpayer has properly filed. See Appleton v. Commissioner, 140 T.C. 273, 284 (2013). When assessing whether a document is a return, this Court generally relies on the test articulated in Beard v. Commissioner, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986). Under the Beard test a document is a return for statute of limitations purposes if: (1) there is sufficient data to calculate a tax liability, (2) the document purports to be a return, (3) there is an honest and reasonable attempt to satisfy the requirements of the tax law, and (4) the taxpayer executed the document under penalties of perjury. Id. at 777. The Form 1040 that petitioner mailed April 14, 2018, satisfies the requirements of the Beard test and therefore constitutes a valid return. Furthermore, respondent does not challenge petitioner’s assertion that the Form 1040 was a return; rather, respondent argues that the return and the embedded claim were not filed within the relevant period of limitation.[8]

The Tax Court does not accept the IRS’s view that their rejection of the return due to suspected identity theft rendered the return never properly filed. Rather the Court found:

A return is considered filed when it is “delivered, in the appropriate form, to the specific individual or individuals identified in the Code or Regulations.” Allnutt v. Commissioner, 523 F.3d 406, 413 (4th Cir. 2008), aff’g T.C. Memo. 2002-311; see also sec. 7502 (implicitly equating filing with delivery). A valid return is deemed filed on the day it is delivered, regardless of whether it is accepted by the Commissioner. See Blount v. Commissioner, 86 T.C. 383, 387 (1986) (holding that the period of limitation begins to run when a valid return is delivered to the Commissioner, whether or not accepted). Respondent’s records indicate that petitioner’s Form 1040 was received by May 2, 2018. The Form 1040 petitioner mailed to respondent on April 14, 2018, is therefore deemed to have been filed on or before May 2, 2018.

Petitioner’s 2014 return was due October 15, 2015, meaning the three-year period of limitation expired on October 15, 2018. See sec. 6511(a). The Form 1040 petitioner mailed on April 14, 2018, was delivered, and therefore filed, by May 2, 2018. The claim embedded in the return was filed concurrently. The return and the embedded claim were thus both filed before the three-year period of limitation expired on October 15, 2018. Petitioner is entitled to receive an overpayment credit or refund of $1,553.[9]

The finding here should not be surprising to the reader—as the Tax Court notes, it’s been made clear previously that the IRS’s refusal to accept a return that otherwise meets the criteria for a proper claim does not nullify the timing of that original filing. But it does illustrate a rather frustrating issue we often run into in tax practice—the IRS itself often operates systems that ignore such clear legal guidance, especially when implementing systems such as those put in place to combat identity theft.

It is very possible that if the taxpayer had retained representation that this issue might have been resolved much earlier, though the $1,553 balance in question also renders representation questionably cost-effective in a case like this. But the one piece of good news is that this case, combined with the earlier Fowler case, gives advisers some rather clear guidance to place before IRS representatives when looking to resolve these issues.

While the IRS computers almost certainly will continue to apply the wrong dates for purposes of determining the date a statute begins running, the case law is becoming very clear that IRS processing decisions related to identity theft that falsely flag a return as being suspect do not change the statute dates—as long as the IRS received the return in question, the statute begins to run.

[1] Edward Zollars, “Taxpayer's Failure to Include IP PIN on Return, Triggering E-File Rejection, Did Not Delay the Beginning of the Running of the Statute of Limitations,” Current Federal Tax Developments, September 9, 2020, https://www.currentfederaltaxdevelopments.com/blog/2020/9/9/taxpayers-failure-to-include-ip-pin-on-return-triggering-e-file-rejection-did-not-delay-the-beginning-of-the-running-of-the-statute-of-limitations (retrieved November 25, 2021) discussing the case of Fowler v. Commissioner, 155 TC No. 7, September 9, 2020

[2] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021, https://www.taxnotes.com/tax-notes-today-federal/individual-income-taxation/rejected-return-was-timely-filed-overpayment-credit-or-refund/2021/11/23/7cmm1 (retrieved November 25, 2021)

[3] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021

[4] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021

[5] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021

[6] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021

[7] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021

[8] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021

[9] Willets v. Commissioner, TC Summary Opinion 2021-39, November 22, 2021