Does an IRS Audit Waive a Defect in Tax Return?

When it comes to technicalities in the tax law, the failure to comply with some technicalities can be overcome. Others cannot.

As a general rule, the courts evaluate tax disputes involving technicalities based on the policy underlying the technicality versus fairness for requiring strict compliance. If the policy for the technicality is important, the court is less concerned about fairness in requiring strict compliance.

Take the situation where a tax return was not signed by the taxpayer. The policy for requiring signatures on tax returns is to make it easier for the government to tell that the taxpayer is the party who submitted the tax return and it helps the government prosecute taxpayers who submit false returns.

While the signature requirement may have been important when tax returns were paper-filed, most tax returns are not paper-filed these days. Most returns are e-Filed. e-Filed tax returns are not signed. The only document with a signature is not provided to the IRS. It is kept by the tax return preparer. So the IRS never even sees the signature for most tax returns these days.

So how important is the taxpayer’s signature on a tax return? The court addresses this in Clark v. United States, No. 16-71V (Ct. Cl. 2020). The court address whether a missing signature requirement is so important that it cannot be waived even when the IRS later audits the tax return and when the taxpayer makes it clear that the signature on the return by a third party was authorized by the taxpayer.

Facts & Procedural History

The taxpayers hired a new tax advisor to prepare their 2016 tax return. In preparing the return, the tax advisor noticed errors in the taxpayers’ 2014 and 2015 tax returns.

In late 2017, the tax advisor filed amended tax returns for the taxpayers for 2014 and 2015. The amended returns were reported on the Form 1040X, Amended U.S. Individual Income Tax Return, as required by the IRS. The tax advisor signed the 1040X’s as the tax preparer and as the taxpayer. The taxpayers did not sign the Forms 1040X themselves.

In 2018, the IRS selected the amended returns for audit. At that point, the tax advisor submitted a Form 2848, Power of Attorney and Declaration of Representative, to the IRS for the 2014 and 2015 tax years. The Form 2848 authorized the tax advisor to sign tax returns, etc. Presumably, the taxpayers signed the Forms 2848.

The IRS auditor issued several document requests and worked with the tax advisor to evaluate the refund claims. After not hearing from the IRS auditor for several months, the taxpayers filed suit in the Federal Court of Claims. The government then filed a motion to dismiss based on the Forms 1040X not having been signed by the taxpayers.

The question for the court was whether the IRS waived the defect, the signature requirement, by auditing the Forms 1040X.

The Requirement to Sign a Refund Claim

A filing of a valid refund claim is one of the prerequisites to being able to bring suit to recover a tax refund.

Section 7422(a) says that no suit for a tax refund “shall be maintained in any court . . . until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.”

To count as a valid tax return, the tax return generally has to be signed by the taxpayer. This includes amended tax returns, which are treated refund claims. The regulations say that the claim has to be signed by the taxpayer along with a statement that it is signed under penalties of perjury.

There was no dispute that this language in the regulations requires the taxpayer to sign the Forms 1040X in this case. Instead, the taxpayers argued that the IRS waived the signature requirement by auditing the refund claims.

IRS Waiver of a Technical Defect

The term “waiver” is commonly understood to mean “the act of intentionally relinquishing or abandoning a known right, claim, or privilege.”

The IRS argued that it only waives a tax return filing defect, such as a missing signature, if the IRS examines the claim and then disallows the claim. According to the IRS attorneys, it never disallowed the claim in this case. Thus, according to the IRS attorneys, there could be no waiver.

The Court did not agree with the IRS. It noted that there could be a waiver even without a disallowance. There just has to be evidence that the IRS intended to waive the defect.

Evidence of IRS Waiver is Required

The Court also did not agree with the taxpayers as the Court found that the evidence of waiver by the IRS was insufficient:

Here, the Clarks have not shown that the IRS knew—or even should have known at the time it launched its examination—that the Clarks had not personally signed their amended forms or verified their accuracy under penalty of perjury. The signatures on the lines for the taxpayers and the preparer on the Forms 1040X that the Clarks submitted in October 2016 were illegible. Def.’s Mem. Ex. 3, at 2 (2014 amended return); id. Ex. 4, at 2 (2015 amended return). Further, the amended returns were not accompanied by a Form 2848, which would have alerted the IRS to the fact that the Clarks had not signed them. It was not until July 23, 2018, several months after the examination was launched, that the Clarks submitted the Forms 2848 that bore their signatures. The IRS was under no obligation at that time to compare the signatures on the Forms 1040X and 2848 to verify that they belonged to the same individuals. And there is no evidence before the Court that it did so.

The court considered the Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945) case in reaching this decision.

Angelus involved a taxpayer who operated in more than one legal entity. The entities filed refund claims on the wrong tax forms, for the wrong amounts, for a partial tax year, and an amendment to the original claims was submitted to the IRS. The IRS audited the refund claim for one of the entities and offered a refund for it. It disallowed the other entity’s refund claim on the basis that not enough information was provided for the claim, so the IRS was not apprised of the basis of the claim. The disallowance was appealed to the U.S. Tax Court.

Because the taxpayer in Angelus operated in two related entities and the IRS only audited the other entity, the Court noted that the IRS only learned of the facts for the refund claim for the entity before the court by examining the other entity. This was the basis of the Court’s decision. The Court found that there was not enough evidence of waiver by the IRS for the entity that wasn’t even audited.

The Angelus case wouldn’t seem to apply here. The defect in Angelus did not put the IRS on notice of the substance of the claim. And the IRS did not audit that particular claim, so it did not have notice of the substance of the claim. In the present case, the IRS was fully aware of the substance of the claim.

Also, in Angelus, the defect with the tax return was not a signature or verification issue. A missing signature does not deprive the IRS of any information needed to evaluate the refund claim.

Moreover, even if the IRS was not apprised of the defect in the present case at the time the returns were filed, it certainly was as part of the IRS audit. In fact, the defect was cured by the later filing of the Form 2848. The Form 2848 specifically notes that the tax advisor was authorized by the taxpayers to sign tax returns and he was authorized to do so for the years at issue in the case. The court did not address whether the defect was cured.

The Takeaway

The present case was filed in the Federal Court of Claims. It is not clear how other courts would rule on this matter.

If the court is correct, this case stands for the proposition that a defect in refund claim can be waived by the IRS. For waiver to apply, the IRS has to either (1) reach a final decision to partially allow or disallow the claim despite the defect or (2) the taxpayer has to show that the IRS was aware of the defect.

For the second option, it is not clear what would apprise the IRS of the defect in the signature. Filing a Form 2848 was apparently not sufficient. Perhaps a letter to the IRS along with the Form 2848 and/or an updated Form 1040X with the taxpayer’s signatures would suffice.

Taxpayers in this situation may be better off asking the IRS to issue a claim disallowance letter. IRS agents are usually willing to do so if the taxpayer makes a request for a disallowance.

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