Can the Wrong Return Start the Statute of Limitations on Assessment

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In In re Quezada, the bankruptcy court in Austin, Texas faced the issue of whether a Form 1040 could start the statute of limitations for filing Form 945.  The court declined to grant summary judgment to the IRS finding that the issue was one of substantial compliance and it did not have enough information to make the determination.  Because the issue of one return triggering the start of the statute of limitations for another is not an issue we have previously discussed, the case deserves some attention.


Mr. Quezada is a brick layer and one whom the IRS says owes $1,269,561.89.  It will take him quite a while to lay enough bricks to pay off a liability of that magnitude.  Mr. Quezada not only lays bricks but he hires others to assist him.  The hiring of others leads to his problems.  Many people worked for him over the years.  He treated these other workers as independent contractors; however, he did not file or send the IRS the necessary forms (e.g. Form 1099) in connection with the payments to these individuals.  His substantial liabilities stem from this failure over a period of several years.

Assuming that the individuals who worked with him were independent contractors, Mr. Quezada still had reporting obligations to the IRS.  The IRS, in this proceeding, did not contest that the individuals working with Mr. Quezada were independent contractors.  He needed to provide the Taxpayer Identification Numbers (TINs) to the IRS of all of these individuals or withhold 28% of certain taxable payments and to report on Form 945 this “backup withholding.”  If an employer fails to withhold the taxes and to file the Form 945, the employer can still avoid liability by showing that the independent contractors reported and paid taxes on the payments received from the employer.  To meet this exception, the employer must obtain a Form 4669 (Statement of Payments Received) from each of the persons treated as an independent contractor.  This form involves the independent contractor declaring under penalty of perjury that a tax return was filed reporting all of the payments received from the employer.  If you have a large number of independent contractors and if some time has passed before the IRS comes looking for compliance with the payment rules, it could prove quite difficult to locate and persuade all of the individuals receiving these payments to sign such a document.

In this case, Mr. Quezada failed to do any of the three things that could have kept him from having a huge liability for the backup withholding.  He did file his own return for the years at issue reporting the income and expenses of the business.  Of course, this provides no assistance to the IRS in identifying the individuals he paid and how much he paid.  Because several years had passed before the IRS came to him to question his employment tax situation, he argues that the time for the IRS to do this has passed.  The IRS counters that his failure to file Form 945, the correct return for reporting the backup withholding, keeps the statute of limitations on assessment open for an unlimited period.

The IRS argued that filing Form 1040, while nice and important for other reasons, has nothing to do with the liability at issue in this case.  The bankruptcy court finds that no court has ruled on the issue of whether a Form 1040 can trigger the three-year limitations period for Form 945; however, it notes that several cases have addressed the issue of one return triggering the statute of limitations where taxpayer has failed to file another return.  The leading case on this issue is Commissioner v. Lane-Wells Co., 321 U.S. 219 (1944).  In Lane-Wells, the issue concerned whether filing a corporate tax return could cause the statute of limitations to run on the taxpayer’s obligation to file a personal holding company return.  The Supreme Court rejected the taxpayer argument that a corporate return would trigger the time limitation for file a personal holding company return.

Finding that the liabilities were separate, the Court found the need to file each of the returns.  The test articulated by the Court was that the statute of limitations is not triggered by the different return if the information in that return is insufficient to “show the facts on which liability could be predicated.”

In a case with facts closer to those presented by Quezada, the Ninth Circuit in Springfield v. United States, 88 F.3d 750 (9th Cir. 1996) held that filing Form 1099 did not start the time period where the taxpayer was required to file Forms 940 and 941.  In that case, the taxpayer treated salesmen as independent contractors rather than employees and then argued that it put the IRS on notice of the issue when it submitted the Forms 1099 for these individuals.  The Ninth Circuit opinion created a narrower test finding that the issue of whether one return could trigger the statute of limitations for another turned on “whether the return filed sets forth the facts establishing liability.”  It found that Form 1099 did not provide the IRS with the necessary information.

The bankruptcy court in Quezada concluded that the rationale in these cases turned on substantial compliance.  It looked at the elements of a return as articulated in Beard v. Commissioner, a case we have discussed often in the context of what triggers a discharge when a return is filed late.  The bankruptcy court determined that the decision of substantial compliance turns on the specific facts of each case and since it did not have the Form 1040 filed by the Quezadas, it could not make a decision at this point.

I have sympathy for the Quezadas because many, if not most, of the individuals paid during the years at issue probably did file tax returns and pay taxes on the wages paid to them.  Probably, the Quezadas will be paying the tax twice in effect.  I will be surprised if the bankruptcy court finds a way to hold that the Form 1040 takes the place of Form 945.  To make matters worse for the Quezadas, if the bankruptcy court finds that their Form 1040 cannot take the place of Form 945, that decision also means that the liability cannot be discharged because of the unfiled return.  I suspect an offer in compromise may be in their future.


  1. Virginia La Torre Jeker, J.D. says

    Great post here! Thanks for the info. A nice reminder to us all that failures to file any tax form can lead to severe consequences.

  2. Excellent post. Starting in 2011, Schedule C included yes/no boxes which are used to indicate whether the taxpayer had a Form 1099 filing requirement, and whether Form 1099’s were actually filed. I wonder if this case would have reached a different decision had the taxpayer said “yes” to having a 1099 filing requirement, and “no” to whether the Forms 1099 were actually filed. Such answers on Schedule C would appear to put the government on notice of the Form 945 compliance issue, however the Form 945 calculation would still be unknown.

    • Factual summary above is incorrect. Taxpayer filed 1040’s together with Schedule C’s and Forms 1099’s. Tax adviser sent “hard copies” of 1099’s (common practice). However, IRS files were lost after suicide airplane crashed into IRS building in 2010. In 2012, IRS claimed it has no issue with 1040’s or attachments but made assessment base on claim of no Form 945 due to missing SS# on the 1099’s. which is false but cannot be shown by taxpayer at this time.
      But, the 1099’s indicate “no withholding” on contractors. “Same info would have been shown on Form 945 except it states on Line 3 and Line 7: If total annual withholding is less than $2500, then do not report this here and do not file this form. That’s what taxpayer’s advisor did.
      Also, read my comment shown elsewhere in the blog.
      Carlos Quezada, brother to James Quezada and attorney at law in Texas and in US Tax Courts.

  3. My name is Carlos Quezada, brother of James Quezada and licensed attorney in Texas and in US Tax Court.
    Thanks for the post, but I have GREAT CONCERN about restating faulty facts and perhaps errors made by the Bankrupty Court in Austin. First, read Lane-Wells & Springfield and see how Appellate Courts have reversed the lower courts’ findings against taxpayer.
    The ruling by the Supreme Court in Comm v. Lane-Wells reversed the lower Court’s opinion and held:
    Facts: Taxpayer was a corporation that filed the usual corporation income tax returns on Form 1120 but failed to file a personal holding company income tax return on Form 1120H, believing in good faith that it was not a personal holding company within the meaning of the Revenue Act of 1934. On appeal, the Supreme Court held that by disclosing its gross income, deductions and resulting net income, the corporation “showed all the facts necessary for the respondent to compute the taxes as a personal holding company obligation” and, therefore, the statute of limitations began to run upon the filing of the Form 1120.
    The Commissioner, had determined “… that such a return was “no return” whatsoever, and hence he was entitled to determine deficiencies thereon at any time, here in 1939, over four years after the 1934 return and over three years after the 1935 return were filed… The Commissioner also determined penalties of 25 per cent for each year on the theory that (taxpayer) had failed to file any returns….”
    Ruling: We do not agree that the returns are to be deemed not made. They started the running of the time for assessment.”
    Re “Springfield”,
    Facts: “At issue was taxpayer’s challenge of the district court’s finding that (Springfield’s tax) assessments are not barred by the statute of limitations and … (taxpayer) is not entitled to treat his salesmen as independent contractors.”
    Ruling: The Ninth Circuit held, “… because the trial court erred in concluding that Springfield is liable for the assessments, we reverse.”
    “Springfield put on substantial proof that a significant segment of the used car industry treated its salesmen as independent contractors, thus demonstrating a reasonable basis for treating his salesmen in this manner.”
    “The filing of Form 1099 would not necessarily alert the IRS that the employer/taxpayer is liable for additional taxes resulting from the individual’s employment status (IF THEY WERE EMPLOYEES). Springfield’s contention (is) that he … had a reasonable basis for treating his employees as independent contractors.
    In light of the foregoing, we reverse and remand to the district court with instructions to enter judgment in Springfield’s favor.

    Therefore, both Lane-Wells and Springfield support Quezada’s argument that his filing Form 1099’s provided the IRS sufficient information to allow computation the taxpayer’s liability and these filings also started the statute of limitations periods.

    Comments most sincerely welcomed. Also, I am searching for an attorney to write an Amicus Brief supporting our view. Please contact me if you wish to provide service and advise of fee requirements.

    Carlos Quezada

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