In legal disputes, there are times when parties make representations that are not true. That includes the IRS and its auditors and attorneys.
If the taxpayer is lucky, they will have direct evidence that shows that the representation is false. There are situations where the law does not allow that evidence to be considered. There are quite a few examples of this. They often involve cases where the law says that the taxpayer cannot offer “extrinsic evidence.” In other cases it involves rules of evidence or court cases that exclude certain types of evidence, such as phone recordings. Situations like this raise questions about justice and fairness and whether the taxpayer really gets their day in court.
This brings us to Pond v. United States, No. 1:21CV83 (M.D.N.C. 2022) and the tax mailbox rules. The question presented is whether the taxpayer can introduce evidence that the IRS received their tax return if they did not mail the tax return to the IRS via regular or certified mail? Can the taxpayer offer testimony about mailing the tax return to the IRS or even produce a letter from the IRS that acknowledges that the IRS received the tax return timely?
Facts & Procedural History
The taxpayer invested in a partnership. The IRS audited and adjusted the partnership’s tax return. The IRS also sent the taxpayer a computational adjustment notice saying that he owed a balance. The IRS’s numbers were apparently wrong.
The taxpayer’s CPAs discovered the IRS error after the taxpayer had already paid the taxes.
In July of 2017, the taxpayer’s CPAs mailed amended tax returns to the IRS for the 2012 and 2013 tax years. They were both included in the same envelope.
The IRS issued a refund for the 2012 tax year in March of 2018.
The taxpayer re-submitted the amended return for 2013 to the IRS several times. It was even received by the IRS on February 4, 2019.
After what appears to be years of effort to contact the IRS and resubmitting the amended return numerous times, the IRS eventually denied the refund claim for 2013 on October 1, 2019. The IRS cited the statute of limitations for submitting claims as the basis for the disallowance.
The IRS apparently also denied the taxpayer their legally-mandated administrative appeal.
The taxpayer then sued the IRS in district court to recoup his refund.
Time Limit for Filing Refund Claims
The taxpayer generally has to file a refund claim within three years of the latter of (1) the date the original return was filed or (2) two years from the date of payment. That is the general rule. There are several exceptions and nuances. We won’t go into those for this article.
This article is about when the three year or two year period starts to run. Specifically, when does it start to run if the taxpayer mails a copy of the tax return to the IRS?
There are a few possibilities. The time period could start to run from the date the taxpayer puts the tax return in the mail. It could run from the date the IRS receives the tax return. It could run from the date the IRS receives and processes the tax return.
This date matters as the postal service may not timely deliver the tax return to the IRS. The IRS may lose the tax return. And the IRS may sit on the tax return for some time before processing it. Having practiced in this area for nearly twenty years, all of these scenarios are more common than they should be.
The Mailbox Rules
As you probably guessed, these types of disputes have ended up in court (we have covered several mailbox rule cases, such as this one and this one and the same rule for tax court petitions). The courts that considered these cases have held that the tax return is deemed to have been received by the IRS after a reasonable time for the postal service to deliver the mail, as long as the taxpayer sent the tax return with the proper postage, etc. This is referred to as the common law mailbox rule.
Congress followed suit by enacting Section 7502. Section 7502 was the same as the common law, except it required actual delivery to the IRS. Mail that was lost by the U.S. Post Office did not satisfy the rule. This is often referred to as the statutory mailbox rule.
The proof required for each mailbox rule differed. The common law rule could be proven by testimony that the tax return was delivered to the U.S. Post Office, etc. The statutory rule required the taxpayer to prove that the tax return was sent via registered or certified mail. This is why the mailbox rule is so important. It can serve to limit the evidence the taxpayer can present to prove that they mailed their tax returns to the IRS.
The Split of Authority
Some courts continue to apply both mailbox rules, concluding that the statutory mailbox rule is just a safe harbor. To the extent the taxpayer mailed the tax return by registered or certified mail, the statutory mailbox rule applies. If the taxpayer did not mail the tax return by registered or certified mail, the common law rule applies.
Other courts have concluded that the statutory mailbox rule nullified the common law rule. The Treasury amended the regulations for Section 7502 to state its interpretation that the common law rule no longer applied. This change has prompted at least one appeals court to side with the Treasury on this issue.
There is a split of authority in the circuit courts of appeals on this issue. The Eighth and Tenth Circuits have concluded that the common law mailbox rule can still apply. The Tenth, Second, Sixth and Ninth have reached the opposite conclusion.
This brings us back to the current case. The district court in the case concluded that the common law mailbox rule no longer applies. The court relied on the regulation and, given the regulation, concluded that the taxpayer could not prevail as they did not mail the first tax amended return by registered or certified mail. Given this rule, the evidence that the taxpayer did mail the tax return timely and the circumstances were not considered by the court.
What About Equitable Tolling?
It should also be noted that equitable tolling is the remedy for this type of case. This is a judicial doctrine that starts the time running from the date of the discovery of the error.
Equitable tolling would not apply in this type of case. Equitable tolling generally does not apply absent proof that Congress intended that the statute be tolled. There just isn’t evidence of this, particularly since Congress has not acted given the changes to the Regulations and the frequent disputes in this area.
If appealed, the case will likely be appealed to the Fourth Circuit. The Fourth Circuit has not yet ruled on this issue.
The Fourth Circuit hears appeals from taxpayers in Maryland, North Carolina, South Carolina, Virginia and West Virginia. Taxpayers in these states who are corresponding with the IRS by mail should take note of this case.
This highlights the benefits of filing tax returns electronically when possible.