Ninth Circuit En Banc Panel Reverses Seaview Trading

We should have covered this case much earlier but sometimes when a case comes out we look for an appropriate guest blogger and the process of getting out a post on an important case gets sidetracked.  That seems to have happened here.

We wrote about Seaview Trading in May of 2022 when the 9th Circuit reversed the Tax Court.  In its holding, the 9th Circuit found that delivery of a delinquent return to a revenue agent who requested it served as the filing of the return starting the statute of limitations on assessment.  This decision had significance.  So much significance that the IRS could not live with the decision and requested an en banc review which the 9th Circuit granted.  While the case was under en banc consideration, we wrote about a Rule 28(j) letter the IRS sent to the court.

On March 10, 2023, the 9th Circuit sitting en banc reversed the decision of the panel restoring the Tax Court’s decision that handing the delinquent return to the requesting revenue agent did not meet the requirements for filing a return.  This meant that the statute of limitations on assessment remained open at the time the IRS sent the taxpayer adjustments to the return since the statute of limitations on assessment never runs with respect to an unfiled return.   In this post I will explain why the full court reversed the panel and talk about the vigorous dissent. 

While the taxpayer in this case was very well represented, in many instances when the IRS employee requests back returns, the taxpayer is unrepresented and unfamiliar with the regulations that govern filing.  The practice of requesting back returns by an IRS employee should always be accompanied by a warning to the taxpayer that delivery of the return does not satisfy the filing requirements.  Without treating a return provided under these circumstances as filed or an adequate warning that providing the return does not satisfy the filing requirements, many taxpayers will be lulled into believing that handing a return to an IRS employee at the employee’s request acts to file the return with all of the attendant issues that flow from filing.  The fact that the IRS has a fair amount of internal guidance that conflicts with its regulation also makes this a tough decision for taxpayers.

The Tax Clinic at the Legal Services Center of Harvard Law School filed an amicus brief in this case at the panel stage but not during the en banc consideration.


Seaview apparently failed to file its return for the tax year 2001 by the due date or during the period after the due date.  At some point a revenue agent reached out to Seaview requesting the return.  Seaview faxed a complete, signed copy of the return to the revenue agent in 2005.  It mailed a signed copy to a Chief Counsel, IRS attorney in 2007.  If either of those actions satisfied the requirements for filing a return, the statute of limitations on assessment would have run by the time the IRS sends the notice of partnership adjustment in 2011.

The relevant regulation, 26 C.F.R. § 1.6031(a)-1(e) (2001), provides:

(e) Procedural requirements—

(1) Place for filing. The return of a partnership must be filed with the service center prescribed in the relevant IRS revenue procedure, publication, form, or instructions to the form (see § 601.601(d)(2)).
(2) Time for filing. The return of a partnership must be filed on or before the
fifteenth day of the fourth month following the close of the taxable year of the partnership.

The IRS instructions to taxpayers in 2001 with a principal place of business in California was to file their return at the Ogden Utah Service Center.  Seaview thought it timely filed its 2001 return and provided the RA not only with a copy of the return but with a copy of the certified mailing receipt for the envelope in which it allegedly placed the 2001 return in July of 2002; however, Seaview conceded on appeal that it cannot prove the IRS received the 2001 return as part of the mailing signified by the receipt.

While Seaview gave copies of its return to the RA and later to a Chief Counsel attorney, neither of the individuals to whom it gave a return forwarded the 2001 return to Ogden and Seaview also did not send a return to Ogden during this period.  In October 2010, the IRS issued a notice of final partnership adjustment disallowing a $35 million loss claimed on the 2001 return.  In Tax Court, Seaview conceded it was not entitled to the claimed loss and limited its argument to the timeliness of the notice because it came too late after Seaview hand delivered the returns to the RA and the Chief Counsel attorney.  The Tax Court rejected Seaview’s argument, but it prevailed at the 9th Circuit panel garnering two votes of the three panel members.

The en banc opinion starts its legal discussion with a quote that limitations periods are “strictly construed in favor of the government.”  That quote provides a roadmap for the discussion to come.  The opening paragraph ends with another quote:

“meticulous compliance by the taxpayer with all named conditions in order to secure the benefit of the limitation.” Lucas v. Pilliod Lumber Co., 281 U.S. 245, 249 (1930).

Since Seaview did not follow the regulation requirement and the relevant IRS instructions for 2001 returns by sending the return to the Ogden Service Center the en banc court reverses the panel decision and reinstates the Tax Court decision.  It points out that its conclusion is consistent with the decisions of other circuits and with a long line of Tax Court opinions.

Seaview argued that the regulation only applies to timely filed returns.  The regulation prescribes both place for and time for filing requirements.  The en banc court rejected that interpretation stating that the regulation makes no distinction between timely and untimely returns.

Seaview argued that handing the return to a requesting IRS employee satisfies the requirement for filing a return based on the IRS’s own historical interpretation and practice.  It pointed to three guidance items promulgated by the IRS: 1) IRS, Chief Counsel Advice No. 199933039 (Aug. 20, 1999) stating Revenue Officers should accept hand delivered returns for filing as delegates of the District Director; 2) IRM § (2005) which instructions IRS personnel to process delinquent returns by sending them to the appropriate campus; and 3) IRS Policy Statement 5-133, Delinquent Returns—Enforcement of Filing Requirements (Aug. 4, 2006),  which says that absent fraud “[a]ll delinquent returns submitted by a taxpayer, whether upon his/her own initiative or at the request of a Service representative, will be accepted.”

The en banc court rejected the argument that these documents overrode the requirement of the regulation.

One judge, Judge Bumatay who served on the panel that overturned the Tax Court decision, dissented.  He finds the manual provision and other actions of the IRS regarding returns to effectively override the strict language of the regulation.  He minces no words in criticizing the decision of the majority:

What makes our court’s decision most perplexing is that the IRS’s public guidances about filing delinquent tax returns with requesting officials adheres to the Tax Code and IRS regulations. The Tax Code only requires filing a return as the IRS “may prescribe in regulations.” 26 U.S.C. § 6230(i) (repealed 2015) (emphasis added). But here, the IRS has promulgated no regulation on how partnerships must file “delinquent” returns. In such cases, we follow the plain meaning of “filing.” And, as the IRS has previously concluded, sending a delinquent return to a requesting IRS official fits with the plain meaning of the term. So the IRS’s public statements about filing delinquent returns with an IRS representative follows the law, and we should have held the IRS to its promises. Instead, our court lets the IRS “speak[] out of both sides of its mouth.”

Judge Bumatay notes that publicly the IRS encourages taxpayers to file returns with IRS representatives while allowing those representatives to decide whether to “file” the return by not forwarding the return to the appropriate Service Center.

[W]e are nation of laws, not bureaucrats. It’s the plain meaning of the Tax Code that governs this case—not the whims of some IRS agent. While the majority may feel that tax liabilities may be easily afforded—or even deserved— by a multi-million-dollar partnership like Seaview, the consequences of our court’s decision will fall on countless taxpayers without the legal resources or means to defend themselves against the arbitrary power of individual IRS officials. (emphasis added)

The dissent goes on for several more pages explaining why Judge Bumatay finds the IRS position in this case inconsistent with the IRC, the regs and its internal guidance.  The reason the Tax Clinic wrote an amicus brief supporting a well-heeled, well represented partnership that invested in a tax shelter is captured by the bolded section of the final quote.  The regulation should not be viewed in a vacuum.  If an IRS employee solicits a return in their official capacity and a taxpayer remits the return, the taxpayer should be allowed to rely on that remittance as a filing even if the IRS employee does not follow the IRM and forward a copy of the return to the appropriate Service Center. 

Of course, taxpayers should file their returns timely with the appropriate Service Center.  Anyone advising a taxpayer should advise them to file their late returns with the appropriate Service Center even if requested to file a return with an IRS employee acting in their official capacity.  The en banc decision and the position of the IRS do not align with fairness to taxpayers.  From a taxpayer rights perspective, this decision fails to protect their rights.

The 9th Circuit Reverses The Tax Court, Finding That The Taxpayer Had Filed A Return When It Provided A Copy To The IRS During Its Examination

We welcome back guest blogger Janice Feldman. Janice is currently a volunteer attorney at the Harvard Law School Federal Tax Clinic and assisted in drafting the amicus brief filed by the clinic on behalf of the Center for Taxpayer Rights in Seaview Trading, LLC v. Commissioner. Prior to volunteering at the clinic, Janice worked for over 30 years in tax administration, first with the Department of Justice, Tax Division and then with the IRS, Office of Chief Counsel. She retired in 2019. At the time of her retirement, Janice was the Division Counsel/Associate Chief Counsel (National Taxpayer Advocate Program) at the Office of Chief Counsel. Keith 

In Seaview Trading, LLC v. Commissioner, the 9th Circuit looked at the age-old tax question of when is a return considered filed for the purposes of starting the assessment statute of limitations. The Center and the Clinic took a keen interest in this case as this issue – when is a return filed — is central to administering a fair and just tax system. Taxpayers and the IRS, alike, need to know what actions are sufficient to trigger the statute of limitations on assessment. Under the Taxpayer Bill of Rights, taxpayers have a right to finality. IRC Section 7803(a)(3)(F). If the taxpayers’ actions are insufficient to trigger the limitations period, then the IRS can make assessments forever.  


In Seaview, the taxpayer, a partnership, believed it had filed its 2001 partnership tax return in July 2002, but the IRS had no record of the filing. In 2005, the IRS commenced an audit of the taxpayer’s 2001 return. The IRS agent conducting the exam notified the taxpayer that the IRS had no record of the taxpayer filing a 2001 partnership income tax return (Form 1065) and requested a signed copy. In response, the taxpayer faxed a signed copy of the return to the agent. The IRS later relied on the information on the faxed return to propose an additional assessment against the taxpayer. The final partnership administrative adjustment (FPAA) proposing an assessment was issued in 2010, which was more than four years after the taxpayer faxed a signed copy of the return to the revenue agent.

The Tax Court in TC Memo 2019-122 took a draconian view holding that the taxpayer did not “file” a tax return when it faxed a copy to the IRS agent. Furthermore, the Tax Court found that the 2001 return faxed to the agent did not even qualify as a “return” reasoning that the taxpayer did not intend to file a return when it faxed the return to agent because the taxpayer included a copy of the certified mail receipt showing a July 2002 mailing date. Since the tax return faxed to a revenue officer was not a tax return filing nor a return, the Tax Court found that the final partnership administrative adjustment (FPAA) issued in 2010 was not barred by the limitations period under section 6229(a).  The IRS had unlimited time to assess as no return was filed.   

The taxpayer appealed to the Court of Appeals for the 9th Circuit. On May 11, 2022, the 9th Circuit rendered its decision and reversed the decision of the Tax Court. A copy of the 9th Circuit decision is located here

The Ninth Circuit stated that “Based on the ordinary meaning of “filing,” we hold that a delinquent partnership return is “filed” under § 6229(a) when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return.”

Since the Tax Court had concluded that the signed copy of the Form 1065 faxed to agent was not a return under the Beard test, See Beard v. Commissioner, 82 T.C. 766, 777 (1984), the 9th Circuit went on to analyze this issue. The 9th Circuit found that the Form 1065 that Seaview faxed to agent met all the Beard criteria and therefore was a return.  

I commend the 9th Circuit. This decision is a big victory for the tax system as the audit process needs to be perceived by taxpayers as fair. When a taxpayer has evinced an honest effort to satisfy his obligation to self-report his tax liability and the IRS relies on that submission as a basis of an examination, the taxpayer should be entitled to finality, and the IRS should not have unlimited time to assess. The receipt of the return by the revenue agent in this situation should start the clock running on the assessment period. The IRS will still have three years from receipt to assess, but the IRS will not have all the time in the world. 

The case was decided in a split decision with a vocal dissent.  The dissenter based her position on the language of the regulation.  The majority acknowledge the regulation but pointed out the places in IRS subregulatory guidance in which the IRS and Chief Counsel instructed employees to accept returns in ways that differed from the rigid requirements of the applicable regulation which required submitting the return to the appropriate IRS Service Center in order for it to start the clock.  Because of the importance of the decision to the system, it will be interesting to see if the IRS accepts the decision and acknowledges that its employees are directed to accept returns in certain circumstances. 

The IRS may decide to limit its acquiescence of this decision to the 9th Circuit and continue to fight this issue in other circuits.  It may decide to seek en banc review encouraged by the dissent or to seek Supreme Court review if it has an adequate conflict.  There will be more to come about this case as the IRS reacts to the decision and plots its path forward.

How Did We Get Here? 2-D Barcoding and the Paper Return Backlog – A Missed Opportunity

In her February 17, 2022 testimony before the Senate Finance Committee, the National Taxpayer Advocate reported that as of February 5, 2022, the IRS had 23.5 million returns and correspondence in its inventory requiring manual processing.  This number includes 17.6 million original and amended individual and business returns, down from the 35.5 million tax returns frozen for manual review at the end of the 2021 filing season on May 17, 2021, but up from the 10.3 million returns unprocessed at the end of December 2021.

Needless to say, this is a big mess.  While not all of the return filing backlog could have been avoided, given the months the IRS mail processing was either fully shut down or impeded because of pandemic conditions, there was a solution that would have sped up the processing of returns significantly.  That solution is 2-D Barcoding or some variation thereof.

read more…

This is not a new idea.  In fact, in the “most serious problem” discussion about e-filing in the 2004 National Taxpayer Advocate Annual Report to Congress (pages 89-109), I noted that 31% of individual returns were prepared on a computer and subsequently printed out and mailed.  The IRS calls these tax returns “V-coders” because they are coded with a “V” when the IRS processes them.  At the time, the IRS was struggling to achieve the e-filing mandate of 80% of all returns by 2007, established in the IRS Restructuring and Reform Act of 1998 and codified in IRC § 6011(f)(1) and (2).  By the 2004 filing season, only 61 million of the 128 million individual returns were e-filed, or 48%.

We proposed the IRS implement 2-D barcoding, by which computer-prepared returns would generate a horizontal and vertical code containing all information on the return upon printing.  Upon receiving the paper return, the IRS could scan the code, which would convert the information into digital form and allow the return to be treated the same as an e-filed return.  Although it would not eliminate the need for human beings to open returns, this approach eliminates the need for manual keystroking of data from the paper return and quality review of that keystroking; it also allows all data to be captured, rather than select fields, improving audit selection and other downstream compliance operations.

In a September 2004 memorandum responding to our inquiry about such implementation, the Director of Customer Account Services, Wage & Investment Operating Division responded that the IRS was not pursuing 2-D bar coding for individual returns because “promoting this method of paper filing would slow the growth of e-filing.”  (See footnote 72 on page 102 of the 2004 NTA Annual Report to Congress.)   Note that at the time IRS did have this technology and was using it to scan paper Form 1065 and Form 1120S Schedule K1s, as well as paper Form 941s.  And note that in 2004, at least 17 states were using 2-D barcoding for paper return filings.

In its formal response to the report’s preliminary recommendation that the IRS initiate processing of 2-D barcodes on paper returns, the IRS stated “… the IRS believes that offering taxpayers a paper alternative to e-file is counterproductive to Congressional e-file goals and sends taxpayers a mixed message as to what Service policy is with respect to e-file.”

In response to this myopic position, TAS responded:

While 2-D bar coded returns may not produce as many benefits as e-filed returns, the IRS must acknowledge that a certain population of taxpayers will always refuse to e-file for one reason or another. Even when the IRS meets the 80 percent goal, it will still need to make paper returns available to the 20 percent of taxpayers who continue to file in such manner. We disagree with the IRS’s point that offering this technology to individual taxpayers would send mixed signals. If taxpayers are properly informed about the benefits exclusive to e-file, it is doubtful that 2-D bar coding technology will attract current or prospective e-filers. However, such technology will still benefit those unpersuaded paper filers and the IRS by avoiding transcription errors and reducing processing costs.

2004 NTA Annual Report to Congress, P. 108, citations omitted.

I reiterated this recommendation in 2006 and 2008 testimony before the Senate Finance Committee and the House Ways and Means Oversight Subcommittee, respectively, and other hearings over the years, as well as in many subsequent Annual Reports, including the 2019 Purple Book, which compiles the NTA’s legislative recommendations.  The 2020, 2021, and 2022 Purple Books continue to reiterate this recommendation.

The idea gained traction despite the IRS opposition:  section 2104 of a bipartisan early version of the Taxpayer First Act actually included a mandate for 2-D bar coding.  The proposed mandate would have been effective for returns filed after December 31, 2019.  Ummm … let’s see: the pandemic arose after December 31, 2019.  So if that mandate had passed or been included in the Taxpayer First Act ultimately enacted, IRS would have the capability of scanning those millions of returns backlogged during the pandemic and get them into the e-filing system.

It now looks like the IRS may finally be coming around to this idea.  The 2022 Purple Book reports “[t]he IRS has indicated an interest in adding 2-D barcodes on all IRS forms and outgoing correspondence due to the industry-proven efficiencies associated with extracting machine-readable data from paper returns and correspondence.  It is exploring both 2-D barcode and OCR [optical character recognition] technology with the software industry as part of a pilot program.”

Now we come full circle.  On December 17, 2021, IRS Chief Counsel issued Program Manager Technical Advice (PMTA) 2022-02 regarding the IRS’s authority to mandate that tax-software developers embed a 2-D barcode in all tax returns.  The memo notes that the current IRS process of manually entering paper return information is “resource intensive and error prone.”   In a very cursory (one-paragraph!) analysis, Chief Counsel concluded the IRS cannot require tax software developers to embed barcodes on returns prepared on their software, because “Section 6011(e)(1), which provides the Treasury Department and the IRS authority to prescribe regulations to determine ‘which returns must be filed on magnetic media or in other machine-readable form,’ does not apply here, because the proposed mandate is not directed to taxpayers or other filers.”

One has to wonder what would have happened if, in 2004, IRS has embraced the idea of 2-D barcoding and sought Chief Counsel advice at that time.  Having the legal opinion that a mandate required legislation, would Congress have enacted such a mandate, given the significant taxpayer benefits and resource benefits of such a mandate and the minimal burden on software developers?  At the very least, would the mandate of the earlier version of the Taxpayer First Act have made it into the final version?

We’ll never know for sure, but one thing we do know is that had the IRS responded to our 2004 recommendation about 2-D barcoding in a positive fashion rather than one-size-fits-all approach it adopts so often, we would not be in the mess we are in now.  This sad history lesson demonstrates that resources is not always the reason for lack of progress.

A New Twist on What Constitutes a Tax Return

In Sienega v. Cal. Franchise Tax Bd. (In re Sienega), No. 20-60047, 2021 U.S. App. LEXIS 35875 (9th Cir. Dec. 6, 2021), the taxpayer/debtor raised a novel argument regarding a document the debtor sought to have the court treat as a tax return.  In this case the debtor argued that the bankruptcy court should treat his audit report from the IRS, which he faxed to the California Franchise Tax Board, as his tax return for the state so that he could discharge his state tax liabilities.  The Ninth Circuit, like the Bankruptcy Appellate Panel and the bankruptcy court before it, declined the invitation.


At issue in Mr. Sienega’s case is his ability to discharge certain taxes.  He failed to file state income tax returns with California for 1990-92 and 1996.  The Ninth Circuit says he went to Tax Court to contest his federal taxes for those years.  Here is a link to the Tax Court docket for the only case filed by Mr. Sienega in that Court.  Of course, it’s not possible to see any of the documents filed in his case, but the docket sheet indicates that he reached an agreement with the IRS to resolve the case.  While the Ninth Circuit describes the resolution of the Tax Court case by saying “the [Court] ruled that Sienega was also liable for accuracy-related penalties of approximately $9,688,” it appears that he agreed to this result. 

As part of his agreement to resolve the Tax Court case, the IRS created a Form 4549-A, a typical form it uses for reflecting adjustments to a tax year.  The Tax Court docket information indicates he was represented in his Tax Court case by Cindy L. Ho and Amanda F. Vassigh.  The Ninth Circuit states that his attorney notified the state of California of the adjustments via fax.  Most, if not all, states impose a requirement on taxpayers to notify the state following a resolution with the IRS.  It’s not clear from the opinion if the attorney who notified the state knew that he had never filed state income tax returns for those years. 

The fax cover sheet transmitting Form 4549-A stated:

Pursuant to California State law, Mr. and Mrs. Sienega hereby notify the Franchise Tax Board that the Internal Revenue Service has made recent adjustments to their [year] federal tax return, which they concede. Following please find a copy of the IRS’ adjustments, including a computation of how the changes were made.

California’s Franchise Tax Board (FTB) issued to him a notice of proposed assessment which indicated that it had no record of a return from him for any of the years.  The letter offered him the opportunity to appeal if he disagreed with the proposed assessment.  In response to the letter, he did not file the missing returns or file a protest.  The proposed assessments became final by operation of law in October 2009.

He did not file bankruptcy until five years later.  He initially filed a chapter 13 petition but it was converted to a chapter 7 case.  The FTB filed an adversary proceeding seeking a ruling that the taxes were excepted from discharge.  That’s when Mr. Sienega put forth the novel argument that faxing the IRS audit adjustment document met his state filing requirement.

The 9th Circuit noted that the California taxing scheme did not have a parallel to IRC 6020(a) which allows an agreement to serve as a return.  It noted that the closest California statute:

does not authorize the FTB to prepare or execute a return. Therefore, under the plain words of the relevant statutes, the return exception contained in § 523(a)’s hanging paragraph does not apply. And it is undisputed that the FTB did not prepare or execute returns for Sienega. Rather, it issued notices of proposed assessment and advised that it had no record of any returns being filed for the relevant years.

Frequent and long term readers of the blog will recognize the phrase “hanging paragraph” in 523(a) as the paragraph that set off the one-day rule controversy discussed here (and in many linked posts).  All of the one-day rule cases of which I am aware involve the taxpayer actually filing a return rather than sending an audit report in its place.

The 9th Circuit then discusses its precedent regarding what is a return, including its adoption of the test set out in Beard v. Commissioner, 82 T.C. 766 (1984) and its application to cases under 523(a)(1)(B) in In re Hatton, 220 F.3d 1057, 1060-61 (9th Cir. 2000) and In re Smith, 828 F.3d 1094, 1096 (9th Cir. 2016).  The 9th Circuit determines that the fax of the IRS adjustment document fails the Beard test as well as a related test for what is a return under California law in the case of In re Appeals of R. & Sonja J. Tonsberg, 1985 WL 15812, at*2 (Cal. St. Bd. Eq. Apr. 9, 1985).  Aside from the fact that the faxed documents don’t purport to be a return, they were not submitted under penalties of perjury, they did not contain enough information to allow the FTB to compute the tax liability, and the fax is not an honest and reasonable attempt to satisfy the requirements of the law.

The only thing surprising about the opinion’s discussion of whether the fax is a return is that the court gave it as much ink as it did.  The case provides some relief from the run of the mill case where a taxpayer makes a logical argument that forces us to think about the limits of the law.  This case stands so far out of the boundaries of what might be considered a return that it requires little effort for the court, or for us, to consider that the faxed material might constitute a return.

Even though the fax is not a return and does not meet the Beard test or the penalties of perjury test, does the debtor have a point that this document gave the FTB the information it needed in order to make an assessment against him and start collecting?  The fax seemed to work for this purpose and the FTB had five years to try to collect from him before he filed bankruptcy.  Should bankruptcy court be hung up on formalities or look at the practical effect of his communication, which was to give the FTB information on which it could make an assessment, to effectively consent to the assessment, and to wait well past the period in 523(a)(1)(B) before seeking to discharge the liability?

It’s certainly understandable that the FTB would not want to start down the slippery slope of allowing most anything to trigger the running of the time period to discharge a tax liability, but at the same time, if the goal of the statute was to put the taxing authority on notice and give the taxing authority adequate time to collect before allowing a discharge, Mr. Sienega seems to have satisfied that goal.  By not discussing the issue in this way and pursuing the formalities of the Beard test, perhaps the court is saying equities and action notice do not matter in this situation and the narrow path to discharge lies through adherence to narrowly prescribed rules of what one must due to set up a liability to meet the test of 523(a)(1)(B).

IRS Announces Stoppage of Notice to Paper Filers Who Remitted Payment and Tax Court Announces Continued Zooming

We blogged on January 6 about the IRS practice of sending notices to individuals seeking to get them to file their 2020 return when the IRS had literally taken their check out of the envelope in which these individuals sent to the IRS their 2020 return.  As we discussed in the post, this practice seemed wasteful both to the IRS and to taxpayers.

Yesterday, the IRS announced that it would stop this practice according to an article by Fred Stokeld in today’s Tax Notes edition.  A small but nice step toward better and more efficient administration. 

The Tax Notes article also reports, and includes, that a letter came from almost 200 members of Congress to the Secretary of Treasury yesterday increasing the pressure on the IRS to get rid of the backlog.  Unfortunately, there have been no reports that a check was included with that letter.  We all want to the IRS to fix the backlog and fix lots of other things but Congress needs to do more than send letters.  It would be nice if it also sent some more money, though even that will not provide an immediate fix.

The letter did request that the IRS take a number of specific steps to provide relief while it works its way through the backlog.  Many of those steps would provide meaningful relief:

However, we respectfully request the IRS consider the following measures to bring immediate relief to taxpayers, and reduce the backlog, during this tax filing season:

– Halt automated collections from now until at least 90 days after April 18, 2022;

– Delay the collection process for filers until any active and pending penalty abatement requests have been processed;

– Streamline the reasonable cause penalty abatement process for taxpayers impacted by the COVID-19 pandemic without the need for written correspondence;

– Provide targeted tax penalty relief for taxpayers who paid at least 70 percent of the tax due for the 2020 and 2021 tax year; and

– Expedite processing of amended returns and provide TAS and congressional caseworkers with timely responses.

Tax Court Announcement

Continuing the unfortunate but quite logical path of its announcement regarding January trials, the Tax Court issued a press release yesterday, informing the parties, and the rest of us, that it was remaining in remote mode through February.  My guess is we will see a similar announcement for March in a few weeks.  We haven’t quite turned the corner yet and these announcements make sense even as they remind us of the continued impact of the virus.  Here is the announcement in full:

Making Additional Work for Yourself and Others

The way the IRS is processing paper returns filed in 2021 is adding significant complexity, cost and time for itself and for taxpayers. This post highlights the problems created for the clients of one preparer, which provide a lesson for everyone trying to get a paper return processed.  In each of the cases discussed below, the taxpayer timely filed a paper return with the IRS and included a check with the return.  The IRS quickly extracted the check from the envelope but failed to note on its system that the check was submitted with a return. 

Instead, it subsequently questioned the taxpayer about why the taxpayer had not filed a return, leading to confusion and unnecessary time spent simply because the IRS did not note the receipt of the return at the time of opening the envelope and did not timely process the return thereafter.  If the IRS would note the receipt of the return at the time of extracting the check from the envelope containing the return and the check, it would seem that it could save itself, and the taxpayer, some trouble.  I have not spoken with anyone at the IRS to explain to me why what has happened here occurred.  Perhaps there is a good explanation and we welcome comments that could shed light on this process. 


Here is a link to the CP80 that a 94-year-old taxpayer received. The IRS notice is only a single page, and instructs the taxpayer that if they have already filed their return, they should send a copy with an original signature to the address on the notice.   Following this instruction causes the taxpayer (and presumably the preparer) to duplicate work and will cause the IRS more work since it now has two returns to process.  The taxpayer made a $5,607 payment with the return, which was mailed to the correct Cincinnati address with the 1040-V voucher.   The return was filed in late February 2021.  

The taxpayer receiving the CP80 is the seventh taxpayer of one preparer to receive such a notice – the other five had also filed their returns with a payment and voucher.  And all six of them were concerned that this was a hoax since each of them knew that their returns had been filed and the payment submitted with the return.  The preparer was suspicious also, until receiving the third client call in one afternoon and realizing that the problem was one of processing by the IRS.  

Three of the notices were sent with an Austin return address, and three with a Kansas City return address.  There is no street address, just the four-digit ZIP Code extension, –0025 in both cases.  Note that there is no return envelope provided, I suppose because returns could be bulky, and no “clip the bottom third of this page to use as a mailing label.”

IRS has a transaction code — 610 — for “payment with return.”  If the IRS is adding that code as it processes the payment, it seems inexplicable that it would send out a notice to someone questioning whether they had filed a return.  How hard would it be, to suppress notices that say “we don’t have your return,” to people who made a payment with a return?

This all goes back to when IRS decided to outsource payment processing to private lockboxes.  It reduced Service Center staffing, but probably cost money in the long run.  The mail is now opened, the check and 1040-V payment voucher processed, and the return is then forwarded to a Service Center, sometimes hundreds of miles away.  It seems that the process of extracting the check does not involve notating the receipt of a return.

The taxpayers referenced in this post filed their paper return with the 1040-V payment voucher and a check, mailing it as required to an address in Cincinnati.  The IRS followed its normal procedure, cashing the check and then sending the return to the pile of “full paid” returns, to process when all of the refund and balance-due returns have been worked. The IRS says there are still 6.3 million returns left to be processed – and the language implies that these returns all have errors or require special handling, like verifying recovery rebate credits. The tax preparer asserts that these issues are not involved with most of the returns here.  Several of them have only a Schedule B attached.  Most don’t even have a 1099-R showing withholding.  Four of these returns were filed in February; the other two, by mid-March.    

The IRS notice instructs the taxpayer to send a copy of their return with an original signature to the address on the notice.  So that’s what the preparer is doing.  This not only creates more work for the preparer, and anxiety for the clients, but more work for IRS when they get around to processing the full paid returns.  Indeed, the IRS operational status website says, “Please don’t file a second tax return or contact the IRS about the status of your return.”  Unfortunately for everyone involved here, most tax professionals are deeply uncomfortable with ignoring an IRS letter. The CYA principle is a strong thumb on the scale that would lead most professionals to send the requested response, even knowing that it’s almost certainly unnecessary and will cause their client further delays and correspondence.

In pre-Covid days, IRS programmed its computers to send a notice to anyone with a credit on their account if the return had not been processed by late December.  They must have suppressed such notices in December of 2020 because I know they were still processing returns well into the new year.  But this year, someone forgot, someone had retired or someone did not think through what was happening. If the 2022 filing season is anything like 2021, the IRS may want to suppress next year’s CP80 notices in advance.  If it intends to continue the process of requesting duplicate returns despite the language on its website and despite the extra work it causes everyone, perhaps it could explain the reasons for creating this additional work so that practitioners can explain it to their clients who must pay for additional practitioner services because of the IRS practice or rely on the practitioner to eat the additional time because of the practice.

Complications from Extensions and Unprocessible Returns

Bob Probasco returns today with an important alert on overpayment interest. Christine

A few months ago, Bob Kamman flagged a number of surprising phenomena he’d observed recently, one of which related to refunds for 2020 tax returns.  Normally, when the IRS issues a refund within 45 days of when you filed your return, it doesn’t have to pay you interest.  That’s straight out of section 6611(e)(1).  Yet, taxpayers were getting refunds from their 2020 returns within the 45 day period and the refunds included interest.  As Bob explained, that was a little-known benefit of COVID relief granted under section 7805A.  Not only were filing and payment dates pushed back but also taxpayers received interest on refunds when they normally would not have.

On July 2, 2021, the IRS issued PMTA 2021-06, which raised two new wrinkles—one related to returns that were not processible; the other related to returns for which taxpayers had filed extensions.  How do those factors affect the results Bob described?


Interest on Refunds Claimed on the Original Return

The general rule is that the government will pay interest from the “date of the overpayment” to the date of the refund.  Normally the “date of the overpayment” will be the last date prescribed for filing the tax return, without regard to any extension—April 15th for individuals—unless some of the payments shown on the return were actually made after that date.  But there are three exceptions applicable to refunds claimed on the original return: 

  • Under section 6611(b)(2), there is a “refund back-off period” of “not more than 30 days” before the date of the refund, during which interest is not payable.  In practice, this period is significantly less than 30 days.  See Bob Kamman’s post and the comments for details.
  • Under section 6611(b)(3), if a return is filed late (even after taking into account any extension), interest is not payable before the date the return was filed.
  • Under section 6611(e)(1), no interest is payable if the refund is made promptly—within 45 days after the later of the filing due date (without regard to any extension) or the date the return was filed.

Section 6611(b)(3) and (e)(1) affect when overpayment interest starts running, while section 6611(b)(2) affects when it ends.

Other Code provisions, however, may adjust this further.

When Is the Return Considered Filed?

This is where “processible” comes in.  Section 6611(g) says that for purposes of section 6611(b)(3) and (e), a return is not treated as filed until it is filed in processible form.  As the PMTA explains, a return that is valid under Beard v. Commissioner, 82 T.C. 766 (1984), may not be processible yet, because it omits information the IRS needs to complete the processing task.  IRM gives an example of a return missing Form W-2 or Schedule D.  Those are not required under the Beard test, but the return cannot be processed “because the calculations are not verifiable.”  The PMTA also mentions a return submitted without the taxpayer identification number; still valid under the Beard test but the IRS needs the TIN to process it.

As a result, under normal conditions, if a valid but unprocessible return is filed timely, and a processible return is not filed until after the due date, the latter is treated as the filing date for purposes of section 6611(b)(3) and (e).  The return is late, so the taxpayer is not entitled to interest before the date the (processible) return was filed.  And the 45-day window for the IRS to issue a refund without interest doesn’t start until the (processible) return was filed.

And Now We Add COVID Relief

The previous discussion covered normal conditions, but today’s conditions are not normal  As we all recall, the IRS issued a series of notices in early 2020 that postponed the due date for filing 2019 Federal income tax returns and making associated payments from April 15, 2020, to July 15, 2020.  The IRS did the same thing for the 2020 filing season, postponing the due dates from April 15, 2021, to May 17, 2021.  (Residents of Oklahoma, Louisiana, and Texas received a longer postponement, to June 15, 2021, as a result of the severe winter storms.)

This relief is granted under authority of section 7508A(a)(1), responding to Presidential declarations of an emergency or terroristic/military actions.  For purposes of determining whether certain acts were timely, that provision disregards a period designated by Treasury—in effect, creating a “postponed due date.”  The acts covered are specified in section 7508(a) and potentially, depending on what relief Treasury decides to grant, include filing returns and making payments.  For the 2019 filing season, the IRS initially postponed the due date for payments and then later expanded that relief to cover the due date for filing tax returns.

(Yes, the section 7508A provision for Presidentially declared emergencies piggybacks on the section 7508 provision for combat duty.  As bad as the disruptions caused by COVID have been, I prefer them to serving in an actual “combat zone.”  Hurricane Ida, which I am also thankful to have missed, may be somewhere in between.  All get similar relief from the IRS.)

Section 7508A(a)(2) goes beyond determining that acts were timely.  It states that the designated period, from the original due date to the postponed due date, is disregarded in calculating the amount of any underpayment interest, penalty, additional amount, or addition to tax.  No penalties or underpayment interest accrue during periods before the postponed due date, just as they don’t accrue (in the absence of a Presidentially declared emergency) before the normal due date. 

That’s the right result, and section 7508A(a)(2) is necessary to reach it.  Section 7508A(a)(1) simply says that the specified period is disregarded in determining whether acts—such as payment of the tax balance due—are timely.  It doesn’t explicitly modify the dates prescribed elsewhere in the Code for those acts.  The underpayment interest provisions, on the other hand, don’t focus on whether a payment was timely.  Section 6601(a) says underpayment interest starts as of the “last date prescribed for payment” and section 6601(b) defines that without reference to any postponement under section 7508A.

What about overpayment interest on a refund?  Section 7508A(c) applies the rules of section 7508(b).  That provision tells us that the rule disregarding the period specified by Treasury “shall not apply for purposes of determining the amount of interest on any overpayment of tax.”  Great!  We won’t owe interest for that designated period—April 15, 2020 to July 15, 2020 for the first emergency declaration above—on a balance due, but we can potentially be paid interest for that period on a refund.

Section 7508(b) also states that if a postponement with respect to a return applies “and such return is timely filed (determined after the application of [the postponement]), subsections (b)(3) and (3) of section 6611 shall not apply.”  That certainly sounds reasonable with respect to 6611(b)(3); it’s a de facto penalty of sorts for filing late, but if you filed your 2019 tax return by July 15, 2020, that should be treated as though you had paid by the original due date of April 15, 2020. 

Section 6611(e)(1) is a little bit different.  It’s not a de facto penalty for late filing; it’s essentially (1) a recognition that processing returns and issuing refunds takes some minimal amount of time and (2) possibly a small incentive for the IRS to do that expeditiously.  But when Treasury grants relief after a Presidentially declared emergency, any refund issued from a timely return will include interest, unless some other provision overrides it.  That’s what Bob Kamman’s Procedurally Taxing post pointed out and explained. 

And Now, the PMTA

It appears that the PMTA is correcting earlier analysis.  I haven’t been able to track down any earlier guidance, but the PMTA refers to “our previous conclusions” and those differed from the conclusions in the PMTA.  The conclusions in the PMTA seem correct.  Summarized:

  1. If the IRS determined a postponed due date under section 7508A, a return filed by the postponed due date means section 6611(b)(3) and (e) do not apply.  The return need only be valid under the Beard test to be timely and trigger the provisions of section 7508A; it doesn’t need to be processible.  This is what the “previous conclusions” got wrong, apparently thinking that whether a return was timely for purposes of section 7508A depended on whether it was processible.  But section 6611(g) defines “timely” only for purposes of section 6611(b)(3) and (e), not section 7508A.  It doesn’t matter whether the return was timely filed for purposes of 6611(b)(3) and (e); section 7508A negated them.  The default rules below don’t apply.  Interest will run from the date of the overpayment and there is no exception for a prompt refund.
  2. If the IRS determined a postponed due date under section 7508A, but a valid return is not filed by the postponed due date, it doesn’t meet one of the requirements for sections 7508A(c)/7508(b)—that the return is timely filed by the postponed due date—so the default rules below apply. 

Default rules, if there was no section 7508A relief from Treasury, or the taxpayer did not file a valid return by the postponed due date.  Sections 7508A(c)/7508(b) have no effect, so sections 6611(b)(3) and (e) are in effect and the return is “filed” only when it is processible pursuant to section 6611(g).  Thus:

  • If a processible return is filed by the original due date (or extended due date if applicable) it is not late under section 6611(b)(3), so interest runs from the date of the overpayment.  If it is filed after the original due date (or extended due date if applicable) it is late under section 6611(b)(3), so interest runs from the date the processible return was filed.
  • Whether or not the processible return is filed late, no interest is payable at all if the IRS makes a prompt refund under section 6611(e).  The 45-day grace period starts at the later of the original due date (even if the taxpayer had an extension) or the date the return is filed. 

Note that a return filed after the postponed due date (July 15, 2020) but on or before the extended due (October 15, 2020, if the taxpayer requested an extension) is not timely for purposes of section 7508A.  As a result, sections 6611(b)(3) and (e) are not disregarded.  But it is timely for purposes of 6611(b)(3).  Interest runs from the date of the overpayment rather than the date the return is filed, but the taxpayer may still lose all interest if the IRS issues the refund promptly.

Although the PMTA doesn’t mention it, the “refund back-off period” of section 6611(b)(1) will apply in all cases.  That rule is not dependent on whether a return is processible or filed timely, and it is not affected by a Presidentially declared emergency.

Two Final Thoughts

First, I think the PMTA is clearly right under the Code.  That the IRS originally reached the wrong conclusion, in part, is a testament to the complex interactions of the different provisions and the need for close, attentive reading.  I double-checked and triple-checked when I worked my way through the PMTA.  This was actually a relatively mild instance of a common problem with tax.  Code provisions are written in a very odd manner.  They’re not intended to be understandable by the general public; they’re written for experts and software companies, and sometimes difficult even for them.  I suspect that people who work through some of these complicated interpretations would fall into two groups: (a) those who really enjoy the challenging puzzle; and (b) those who experience “the pain upstairs that makes [their] eyeballs ache”.  My bet is that (b) includes not only the general public and most law school students but also a fair number of tax practitioners.  Which group are you in?

Second, that (relative) complexity leads to mistakes.  I assume that these interest computations have to be done by algorithm.  There are simply too many returns affected to have manual review and intervention for more than a small percentage.  An algorithm is feasible but will require re-programming every time there’s a section 7508A determination, with changes from year to year.  Even when the law is clear, there is a lot of opportunity for mistakes to creep in.  (We’re seen some of those recently in other contexts, e.g., stimulus payments and advanced Child Tax Credit.)  Whether by algorithm or manual intervention, particularly given the change from the original conclusions, there’s a good chance that some refunds were issued that are not consistent with the correct interpreation and may not have included enough interest.  Is the IRS proactively correcting such errors?  If the numbers are big enough, it might be worth re-calculating the interest you received—it’s easier than you may think—and filing a claim for additional interest if appropriate.

Taxpayer Finds Another Way Not to File a Return

Whether a taxpayer has filed a return impacts not only the statute of limitations and penalties but also bankruptcy discharge.  In December I wrote about whether a taxpayer had filed a return in the Coffey and Quezada cases each involving a situation in which the taxpayer did not file a tax return but where the taxpayer argued that what was filed with the IRS or, in the case of the Coffeys, with the Virgin Island tax authorities, constituted the filing of the return in question.  For those with a Tax Notes subscription, you can see an expanded discussion of the cases here.

Another case has come out addressing the issue of whether a return was filed.  In Harold v. United States, (E.D. Mich. 2021) the district court affirms a bankruptcy court’s order denying discharge to a debtor who sent a revenue officer (RO) his tax return for the year at issue prior to the due date of the return but never filed the return with the IRS at the appropriate service center.  The court determines that delivery of the return to the revenue officer under the circumstances of this case did not satisfy the requirement of the taxpayer to file the return.  The case demonstrates, yet again, the importance of following the correct procedures for submitting a return and the trouble that can follow if the taxpayer colors outside of the lines.


 Mr. and Mrs. Harold requested the automatic extension of time to file their 2008 return.  Because they were engaged in collection issues with the IRS about that time, they hired a tax resolution company to negotiate an installment agreement.  On June 2, 2009, well before the extended due date for their 2008 return, their representative faxed materials to the RO assigned to the case and included in the package the first two pages of their 2008 return together with the statement that the 2008 return “was sent to the IRS for filing on June 1, 2009.”  On June 16, 2009, the representative faxed a full, signed copy of the 2008 return to the RO.  At a subsequent deposition the representative described this second sending as a courtesy copy.  The representative testified that he did not remember sending the 2008 return to the service center but that if he had done so, his practice would have been to send it by regular mail.

The Harolds did enter into an installment agreement (IA) in July of 2009.  This IA did not cover 2008 and the letter transmitting the IA made no mention of 2008.  The RO testified that she did not require the filing of post IA returns with her.  She also testified that she regularly directed taxpayers to file future returns with the IRS service center in accordance with normal filing procedure.

Fast forward to 2016 when a new RO enters the scene looking for outstanding returns from the debtors.  The debtors go back to the representative and request a copy of their 2008 return.  The rep provides a copy and says it was filed with the first RO on June 16, 2009.  The IRS assesses the liability for 2008 in 2016 when the second RO obtains the return and five days later Mrs. Harold files a chapter 7 petition.

The IRS filed an adversary proceeding seeking a determination, inter alia, that the 2008 tax liability is not discharged.  The relevant discharge provision is in BC 523(a)(1)(B).  This section excepts from discharges the taxes on a return filed late and filed within two years of the filing of the bankruptcy petition.  Here, the IRS will win, and prevent the discharge of the 2008 taxes, if the submission to the first RO fails to qualify as the filing of a return, since the submission in 2016 immediately prior to the filing of the bankruptcy petition would then become the time of the return filing.

The court notes that the Internal Revenue Code does not define the term “filed.”  It then looks to Sixth Circuit precedent found in the case of Miller v. United States, 784 F.2d 728 (6th Cir. 1986).  In Miller, the court defines the filing of a federal tax return as the time when it “is delivered and received.”  That definition, commonly known as the “physical delivery rule,” may not provide the most helpful guidance here as it relates to mailing of a return.  Mrs. Harold argues that the faxing of the return should count if the court does not believe that her representative sent the return by regular mail.

On appeal she abandoned the argument that her representative mailed the return.  Given his tepid testimony on this point, this concession makes sense.  She pins her hopes on the faxing of the return to the RO.  The IRS does not dispute the fact of the faxing of the return but only disputes the consequence.  She argues not only did faxing the return constitute filing but that doing so met a precondition to acceptance of the IA.  So, the acceptance of the IA validates the faxing of the return as a filing.

This argument sends the court to look at the Internal Revenue Manual to find the IRS internal guidance regarding the requirement for filing past due returns as a precondition to acceptance of an installment agreement.  IRM,, as in effect at the time required the filing of past due returns prior to the acceptance of an IA.  The parties agreed that the IRS would not have entered into an IA if delinquent returns existed; however, the IRS argued the 2008 return was not delinquent in June of 2009 since Mrs. Harold and her husband had validly requested an extension until October 15, 2009.

Mrs. Harold makes a technical point concerning the extension in arguing that it lacked validity.  She argues the extension not only required a timely and proper request but also an extension of time for payment.  Since the time for payment had not been extended and since she owed taxes on the 2008 return, the extension was invalid and her return was delinquent in June of 2009.  Taxpayers who request an extension should pay the anticipated tax liability at the time of the request.  The failure to make a necessary payment with the request could allow the IRS to invalidate the request and treat a return filed after the statutory due date (April 15, 2009) as late.  In this case, however, the IRS transcript showed that the due date had been extended until October 15, 2009.  The RO would have looked at the transcript to determine if a delinquency existed and would have found none.  So, the filing of the 2008 return prior to the acceptance did not create an obstacle for the RO in creating the IA.  The district court followed the bankruptcy court in finding that the 2008 return was not delinquent in June of 2018.

The court then addressed whether the IRS should have accepted the fax of the return to the RO as a filing.  Everyone agreed that giving the return to the RO did not meet the IRS rules governing the proper place to file a return.  The court rejects the faxing of the return as a filing for two reasons.  First, it says it cannot presume Mrs. Harold intended the faxing as a filing in light of the language in the fax stating that the 2008 Form 1040 sent by her representative was a “courtesy copy.”  Second, the faxed return did not go to the proper place.

In rejecting the filing for the second reason, the district court disagreed with the bankruptcy court.  The bankruptcy court found that sending a return to the designated service center is not the only way to properly file a return noting that in Chief Counsel Advice 199933039 the IRS had acknowledged that if a RO requested a return they have the authority to “request and receive hand-carried delinquent returns.”  The district court says relying on the CCA is misplaced because it has no precedential value. 

I disagree with the district court’s conclusion on that point.  Giving the return to a RO or a Revenue Agent who requests a delinquent return has been and should be a recognized way to file a delinquent return.  Unless a taxpayer were given a clear caveat that an RO or RA who requested and received a delinquent return did not consider the transmittal of a return in that circumstance to constitute filing, many taxpayers would be deceived into thinking that they had filed.  The bankruptcy court got this right; however, the district court went on to say that the RO did not solicit the return here and that even if delivery to an RO who solicited a delinquent return could constitute filing, delivery without request does not.  I agree with the district court that delivery without request would not in ordinary circumstances meet the filing requirement, although even in this situation actions by the RO or RA could create an impression of acceptance as filing.

This opinion generated some good discussion among a handful of practitioners with whom I correspond on tax related bankruptcy matters.  Bob Pope noted the absence of a discussion of the one-day rule by the court.  That’s a good catch.  For anyone not familiar with the one-day rule read blog post on it here (citing to many earlier posts.)  Ken Weil notes that before filing bankruptcy Ms. Harold should have checked the IRS transcripts to make sure the 2008 liability was assessed in 2009, which would have allowed her to properly consider her risk before filing the bankruptcy petition.  He also notes he could not find a delegation of authority for an RO to accept a return, although the CCA suggests such a delegation exists.  Lavar Taylor provided an interesting war story involving a similar issue and the practices of ROs regarding returns received after requests.  Bryan Camp noted that the RO’s job has involved “collecting” delinquent returns going back to the 1860s but that he did not think the return would be considered filed until it made it to the office that made the assessment.

You do not want your client to test these waters.  Don’t give a delinquent return to an RO or an RA and expect that delivery to constitute filing.  Send a signed original to the proper service center.  Be aware of the arguments available if your client has delivered a delinquent return to an RO or RA but save those arguments for situations where you are cleaning up after someone else.