IRS Failure to Process Return Does Not Mean Taxpayer Failed to File A Return

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It is all too common for the IRS to fail to process returns that taxpayers submit either electronically or by mail. In Willets v Commissioner, a nonprecedential summary opinion, the Tax Court held that the IRS’s failure to process a return did not equate to the failure to file the return. The legal distinction between processing and filing is significant given that the filing of a return is the jump off point for determining timeliness of assessments and refund claims, and also may determine whether a taxpayer is subject to delinquency penalties. 

Willets involves an original late filed return that reflected an overpayment. That context triggers some dense procedural rules relating to refund claims, so I will discuss the case’s facts, its legal background, and its significance even though it is an S case.

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In Willets, the taxpayer timely filed a request for an extension of time to file his 2014 Federal income tax return. With the extension, the taxpayer sent in an $8,000 payment. He failed to file his return by the extended October 15, 2015 date.  On April 14, 2018, he mailed the 2014 return to the IRS. On May 2, 2018 IRS records indicated that IRS rejected and failed to process the return due to concerns IRS had over identity theft. After the taxpayer failed to respond to the IRS identity theft correspondence, the IRS automated underreporter unit sent a notice of deficiency.  In addition to proposing about $17,000 in additional tax it also proposed approximately $1,000 in delinquency penalties.

The taxpayer filed a Tax Court petition, and in the petition he alleged that he overpaid his 2014 tax by about $1,500. The IRS did not disagree with the amount of the overpayment but alleged that the claim was not timely.

How do the refund claim limitations apply in Willets? Recall that Willets failed to file his original return by the extended October 15, 2015 due date and then mailed his 2014 return on April 14, 2018. That return served dual purpose as a refund claim as it reflected an overpayment.

Willets tees up the refund claim limitations of Sections 6511(a) and 6511(b).

For the purposes of the refund claim SOL, Section 6511(a) provides that the three-year period of limitation for filing a refund claim begins on the filing due date of the relevant return.  For taxpayers whose original return itself serves as the refund claim (like Willets) the key issue concerns the lookback limits of Section 6511(b)(2)(A) and not the general three-year SOL in Section 6511(a) because a refund claim contained in the original return is filed within three years of the filing of the return — in fact the refund claim is filed at the same time as the original tax return.  As a slight tangent, I note that it may be surprising that a late return that contains a refund claim (as in Willets) is automatically timely under the three-year rule of section 6511(a). That position is reflected in Rev. Rul. 76-511, 1976-2 C.B. 428, followed in Omohundro v. United States, 300 F.3d 1065 (9th Cir. 2002) (per curiam).  In Omohumdro, the 9th Circuit overruled its prior precedent of Miller v. United States, 38 F.3d 473 (9th Cir.1994), that had held that in cases of a late original return claiming a refund, the untimely return should not count as a return for purposes of section 6511(a), only a claim, and the taxpayer had to file the claim within two years of payment to be timely under (a). 

Just because a refund claim is timely under 6511(a) does not mean that the taxpayer is home free. The (b)(2)(A) lookback rule generally limits the amount of a refund on a timely filed claim to taxes deemed paid during the period looking back three years plus the six-month extension period from the date the taxpayer files the claim.  

Similar issues have arisen in the past when a taxpayer mails an original return that also has embedded within it a refund claim but arrives to the IRS more than three years after the extended due date. For that issue see Carl Smith’s post District Court Gets Timely Mailing Is Timely Filing Rule of Section 7502 Wrong as Applied to Refund Claim Lookback Period of Section 6511(b)(2)(A) and follow up post District Court Reverses Its Section 6511(b)(2)(A) Ruling and Excoriates IRS and DOJ for Not Citing Relevant Authority .

As Carl discusses in his posts the Second Circuit in Wesibart and eventually the IRS itself conceded that section 7502’s timely mailing rules apply such that the lookback period should begin from the date the return was mailed (not received) if the IRS receives the return outside the three-year plus six month extension time window.

The 7502 issue is not at play in the Willets case, as here the IRS acknowledged receiving the 2014 1040/refund claim in May of 2018 (less than three years from the extended 2014 due date).  The May 2018 delivery of Willets’ 2014 1040 avoids any direct application of the Section 7502 timely mail timely file issue as the IRS received the return before the three-year period (plus extension) of limitation expired on October 15, 2018.

The wrinkle in Willets is that the IRS failed to process the return before the three years had elapsed from the 2014 return’s extended due date of October 15, 2018.  That failure to process the return by October 15, 2018 led to the IRS arguing that the refund claim was barred (I assume under 6511(b) since as I discussed above a late filed return that has an embedded refund claim is timely under 6511(a) though the opinion is not clear on that point).

What Willets adds, and what Keith previously discussed when addressing the Fowler case in Rejecting Returns That Meet Beard and what I discussed in TIGTA Audit Flags Inconsistency in IRS Treatment of E-filed Returns is that when IRS fails to process a return it does not mean the rejected return was not in fact filed.  The Willets opinion discusses the Beard test and easily concludes that Willets’ 1040 satisfies Beard’s requirements. As such, as Willets notes,  “a valid return is deemed filed on the day it is delivered, regardless of whether it is accepted by the Commissioner.”

In holding that Willets’ return was filed even though IRS failed to process it due to ID theft concerns, the opinion notes that the return/claim was deemed filed as of the date of delivery, May 2, 2018.  That filing date meant that the refund claim was both timely under 6511(a) and not limited by the lookback rules of 6511(b).

Conclusion

Willets holds appropriately that the IRS rejection or failure to process a return or refund claim does not mean that a taxpayer has failed to file a return or claim. The distinction between processing and filing is significant, and even more so these days as IRS has had and continues to have a backlog of returns and claims that it has failed to process. As Willets holds, returns that are not processed due to delay or other reasons may in fact be deemed filed so long as they satisfy the Beard requirements. Practitioners need to be alert to consider whether a taxpayer has in fact filed a return, even if IRS transcripts fail to reflect that the taxpayer has in fact filed the return. As IRS may be sitting on a significant number of unprocessed returns that request a refund for well more than six months after their filing date, I would not be surprised to see some taxpayers bringing refund suits off of filed but unprocessed returns.

Hat tip to Ed Zollars whose Current Federal Tax Developments post flagged the Willets case. Ed’s work on that blog is outstanding, and I encourage readers to check it out.

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Kenneth H. Ryesky, Esq. says

    “the lookback period should begin from the date the return was mailed (not received).”

    Actually, merely dropping the return into the mailbox will not suffice; the verb should be “postmarked” and not “mailed.”

    “An envelope mailed is not an envelope postmarked. The two operations are separate and distinct.” [In re George, 185 Misc. 671, 57 N.Y.S. 2d 494, 496 (Sup. Ct., Ulster Co. 1945)].

    • Yep!….though not necessarily postmarked if sent certified or authorized private delivery.

      • Kenneth H. Ryesky, Esq. says

        Proof of timely dispatch by Certified Mail, Registered Mail or authorized PDS are the equivalent of postmarks.

        [On 11 January 2005 I testified at the rulemaking hearing (Unofficial Transcript of Hearing available at 2005 TNT 12-21).].

      • I am confused as to why the Willets case stated “filed” means “delivered” ?? Is it because the taxpayer could not show proof of timely dispatch /”mailing”? Maybe I am missing something….

        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.

  2. David M. Fogel, CPA says

    What I found surprising about the Willetts case was that the IRS created the condition that it later relied upon for claiming that no return was filed. According to the IRS, if you file a return within 3 years of the due date claiming a refund, but the IRS suspects potential identity theft, sends you a letter, and you don’t respond, then the IRS can take the position that you didn’t file a return and aren’t entitled to the refund claimed.

  3. Robert Kantowitz says

    Why it even takes a Tax Court to resolve this is hard to fathom. The IRS’s argument is frivolous. When the taxpayer sends in a return to the IRS at the proper place and it is delivered, can there be any question?! In 1980, I recall an appeal where the IRS was trying to subpoena from a bank the retained copy of a 1099. One of the conditions for the IRS to meet was that the IRS not already have the requested information. In open court, the government lawyer told the circuit that even though they did no doubt have the 1099, when these things came in they went into a warehouse with no filing system and could not be retrieved, and so it should be treated as if they did not have it. The court did not buy that hogwash. Same here.

    It is going to be a lot of fun dealing with refund suits on unprocessed returns. If the IRS stalls or tells the court that no refund is due because they have not processed the return within, say, a year after it was filed, do not put it beyond the power and willingness of a federal judge to sanction the government under FRCP 11, to strike the IRS’s entire response to the suit and to order that the refund claimed be paid.

    It also affects Medicare where the premiums reflect MAGI. A lot of people will either get a windfall or have to file appeals with the Social Security Administration if they are calculating based on returns three years old.

  4. Hi all, I think the Court’s finding that the taxpayer filed a “return” might be dicta. All it needed to find for purposes of the case was whether the document submitted in 2018 was a timely claim for refund. The Court repeatedly conflates those two concepts. But claims for refund are not required to be made on a validly filed “return.” I’ll explore this idea more on Monday when I blog on this case in my Lessons From The Tax Court series. Cheers, -bryan

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