Duty of Consistency for Different Types of Tax Returns

Taxpayers have to report tax positions consistently from year to year.  They cannot get a tax benefit from taking inconsistent positions.  The duty of consistency doctrine provides for this.  But does this doctrine require items to be reported consistently on different types of tax returns?  The court addressed this in Musa v. Commissioner, No. 16-1841 (7th Cir. 2017).

Facts & Procedural History

The taxpayer in Musa filed employment tax returns that omitted several employees.  After the time the IRS had to assess employment taxes for these employees, the taxpayer submitted amended income tax returns showing additional deductions for amounts paid to the employees that were omitted from his employment tax returns.  

The IRS raised the duty of consistency doctrine to disallow the current year’s income tax deductions given the employment tax return position.  The lower court sided with the IRS, which resulted in the current litigation.

The Duty of Consistency

The duty of consistency generally says that a taxpayer may not take a factual position on a tax return in a previous tax year and a contrary position in a later tax year after the time has passed for correcting the prior tax year.  It is a defense that can be raised by the IRS.  

To prevail with this defense, the IRS has to show that there was (1) a knowing representation of fact by the taxpayer, (2) that the IRS relied on the taxpayer’s representation, and (3) the taxpayer attempted to change his position after the time had passed to change the prior tax return.  If the IRS can prove these elements, the IRS can treat the initial tax return position as correct even if it is an incorrect position.

Was There Really Reliance?

The present case comes down to the reliance factor.  On closer consideration, one is left wondering how the IRS relied on the amount of the employment taxes reported on employment tax returns for the amount of the income tax due as reported on the taxpayer’s income tax returns?  

The IRS does not process employment and income tax returns in the same way or even at the same locations.  The IRS has a separate group within the SB/SE division that audits employment taxes.  This group does not audit income taxes and the income tax audit groups do not audit employment taxes (with the possible exception of the Global High Wealth team).

How Broad is the Duty to be Construed?  

Is the IRS to be viewed as a whole when it comes to the duty of consistency?  This is not a narrow question confined to just one fact pattern.  There is quite a bit of information that is reported to the IRS.  Even health insurance information is reported to the IRS on various tax forms these days.

And why stop there, would the duty of consistency apply to the U.S. Treasury of which the IRS is one division?  Could it apply to foreign bank account reporting (“FBAR”) and or information reported to the Alcohol and Tobacco Tax and Trade Bureau (“ATF”)?  Could it even go further and be any information reported to the Federal government?

The appeals court did not address this.  Instead, it affirmed the lower court’s holding.  This suggests a broad reading of the duty of consistency and is consistent with other “consistency court cases.”