TIGTA Audit Flags Inconsistency in IRS Treatment of E-filed Returns

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A recent report from TIGTA highlights the IRS’s inconsistent treatment of millions of e-filed returns that have errors.  IRS e-file processes consider an e-filed tax return as “filed” when the IRS accepts the return for processing, not when the IRS originally receives the return. The TIGTA report reveals that IRS does not have the  “the ability to use the date an e-filed return was initially received as the return filing date.” This is a problem because under the commonly used Beard test the IRS routinely rejects legally sufficient returns, triggering delinquency penalties and uncertainty as to the statute of limitations on assessment, a topic that Keith discussed in Rejecting Returns that Meet Beard. That post covered Fowler v Comm’r, which held that a rejected an e-filed return the return still triggered the 3-year limitation period on assessment. The TIGTA report suggests that there are systemic issues stemming from the IRS practice of rejecting e-filed returns, issues that will likely require a legislative fix or a significant change to internal IRS practices.

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Unlike submitting a return by snail email, when e-filing a return it generates the possibility of the IRS rejecting a return (so called validation problems). Even if an e-filed return is validated, as with paper returns sent via regular mail, the IRS may notice errors that trigger Error Resolution System (ERS) scrutiny. TIGTA notes that there were about 26 million ERS issues on 2019 individual returns, with over 24 million of those errors attributable to “when the tax liability, balance due amount or refund computed is incorrect, or when information on the return does not match the information on a supporting form or schedule.” Not surprisingly the numbers of these types of errors are much higher on paper returns, (appx 15.3 million to 8.9 million).

For some errors, the IRS process for ERS scrutiny generally involves a tax return examiner contacting a taxpayer to correct the error; if over 40 business days elapse without a response the return is often released for processing, though is still tagged with the error code that delayed the processing.

All of this background gets us to the problem that TIGTA flagged, namely inconsistent IRS processes on e-filed returns with errors:

Our review found that IRS processes do not consistently provide taxpayers the opportunity to self-correct errors on e-filed tax returns. For example, some e-filed returns with a missing form are rejected to provide the taxpayer the opportunity to self-correct the error (i.e., attach the missing form and resubmit the e-file return) while others are accepted and sent to the ERS for manual correction by an IRS tax examiner, which suspends the return and holds the refund until the error condition is resolved.

This inconsistency can leads to later problems, as the statutory filing date of a tax return is, as TIGTA notes, “the date the IRS receives a legally valid tax return from the taxpayer.” Yet despite the statutory filing date, which is key for issues like delinquency penalties and the start date for determining when the statute of limitations on assessment expires  “e-file processes do not consider a rejected e-file tax return to be “received” until the taxpayer resubmits the rejected return and the IRS accepts it for processing.”

This rejection can lead to problems, especially if someone is e-filing at or close to the filing deadline.  To be sure this problem is mitigated by the resubmission policy that IRS has adopted. Publication 1345 discusses that process, which allows for sending a snail mail return within 10 calendar days of an e-file rejection:

If the taxpayer chooses not to have the electronic portion of the return corrected and transmitted to the IRS, or if the IRS cannot accept the return for processing, the taxpayer must file a paper return. To timely file the return, the taxpayer must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing. Taxpayers should include an explanation in the paper return as to why they are filing the return after the due date.

As TIGTA suggests, the rejection of e-filed returns that satisfy the Beard test is common. If a taxpayer fails to correct the return (or corrects after the 10-day period) there is the likelihood that a return that would qualify as a return under Beard is not treated by the IRS as filed. IRS desire to maximize taxpayer self-correction of returns makes sense; it can reduce burden, speed up refunds, and avoid possible downstream costs. Yet it seems that millions of e-filed returns that IRS rejects are likely to constitute validly filed tax returns. When facing possible delinquency penalties or there are questions about the SOL on assessment it is important to consider whether the IRS previously rejected an attempted e-filed return.

About Leslie Book

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

Comments

  1. Norman Diamond says

    “Unlike submitting a return by snail email, when e-filing a return it generates the possibility of the IRS rejecting a return (so called validation problems).”

    No, snail mailed returns have the same problem as e-filed returns. Even if the IRS makes an administrative entry that they filed a paper return, months later they can make an administrative entry that the paper return is not on file, and years later they can delete those two administrative entries so the paper return was never filed in the first place. US Tax Court calls that return proffered but not filed.

    • Kenneth H. Ryesky says

      Which is why I always, always, always file my paper returns via approved traceable couriers.

      [This was one key reason why I packed up my desk at the law firm where I had been “of counsel” after I asked the secretary to go to the post office (which was a 100-meter walk across the parking lot) and mail a client’s return to the IRS via Certified Mail. The next day, when I asked her for the Certified Mail receipt, she told me that the boss had told her that Certified Mail was unnecessary and wasteful, and that ordinary First Class mail would suffice.

      Within the next few days, other events happened, including my surreptitious discovery that the firm’s malpractice liability policy had lapsed.

      Fast-forward 28 years: The boss failed to cooperate with the Grievance Committee regarding matters that arose after my departure, decamped out to Texas, and remains suspended from the practice of law in New York.]

      • Norman Diamond says

        The use of an approved traceable courier would not affect the IRS’s administrative transcripts which originally showed filing and subsequent unfiling but which later deleted those two entries. No one disputed that the returns had been delivered in the mail.

        Delivery has been disputed on some mail other than tax returns. For example with 3 pieces of registered mail addressed to the IRS, USPS reported to Japan Post that the items had reached USPS but disappeared with no trace. For example with 1 piece of US domestic certified addressed to US District Court for the Central District of California, USPS delivered to the server (living in the US) the return receipt signed by a court employee and USPS’s web site showed the mail as delivered, but the court ruled that it had not received the mail.

        By the way the “mailbox” rule only applies if mail is delivered late. It doesn’t help a bit if mail isn’t delivered at all, even when you present USPS’s trace that the mail reached USPS before disappearing.

  2. Bill Nemeth, EA says

    Recent Data Entry Experience on Paper-Filed Returns.
    Taxpayer has 3 teenage daughters – paper-filed 2 years of simple returns (2017 & 2018) for his daughters showing that they were a dependent on another return. Two of the 6 returns were entered into the IRS system showing the children were NOT dependents. Had to amend the erroneously-entered returns to show each of them was a dependent, wait for the amended returns to process and then e-file the Taxpayers 2017 & 2018 Returns electronically.

    Bill Nemeth, EA Atlanta

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