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.
read more...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 5.14.1.2, 5.14.1.3, 5.14.1.4.2 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.
There is a Chief Counsel memorandum that a tax return can be filed by delivering it to a Revenue Service Representative at a US Embassy. I think Revenue Service Representatives no longer exist at any US Embassy. When they existed I didn’t know about the memo and never tested it.
When a Settlement Officer requested refilings of three returns I mailed corrected returns to him but he did not file them.
An earlier Settlement Officer had requested refilings of two returns with my new social security number, but the Social Security Administration was uncooperative so I could not deliver anything; but a different IRS employee gave different instructions and I was able to mail corrected returns to that other employee, and IRS transcripts show them as filed but the IRS and Tax Court think the transcripts are incorrect. I had to make more corrections and send another refiled return for one year, which I sent to the IRS office which first demanded it, and I sent courtesy copies twice to the earlier Settlement Officer. The result is that an IRS transcript still shows the first refiling which the IRS and Tax Court consider inaccurate, plus three instances of the second refiling because the earlier Settlement Officer filed the two courtesy copies that I sent her; but now the IRS and Tax Court consider all of those transcript entries to be inaccurate.
It is occasionally impossible for a US resident to file a return. For example when a US employer issues an inaccurate W-2, an honest person like myself would alter the jurat and write an accurate declaration, and the IRS waits years before informing the person that the altered jurat invalidates the return. If a person knows in advance, or learns from the IRS, that the IRS requires signing the preprinted jurat while knowing that the attached W-2 is inaccurate, the latest news is that complying under coercion with the requirement to commit perjury also invalidates the return.
For a US non-resident citizen who usually needs two Forms 1116 (passive and general categories), when the IRS couldn’t provide instructions on how to compute what amounts to carry in or out on line 10, it is almost always impossible to file a return because both options, altering or not altering jurat, invalidate the return. I suppose that if someone lives and works on a US military base and never does any transactions outside of the base then they don’t need Form 1116 and they know all their US dollar amounts, but for nine million other US citizens this is impossible.
So, here are two more ways to fail to file a return. One way is to mail an honest return to the IRS office in Austin Texas where the IRS says to mail it to. Another way is to mail a corrected return complying with instructions stated by the IRS. These returns are proffered, not filed. When 90% of US non-resident citizens don’t even try to proffer a US return, they’re smarter than I was.