The IRS’s Identity Protection Personal Identification Number (“IP PIN”) is intended to protect those who are victims of identity theft. It does so by making it harder for third parties to file fraudulent tax returns.
The IP PIN can also cause problems for taxpayers. This is particularly true for tax returns that are filed close to the due date and where the taxpayer does not know their IP PIN.
Here is the scenario:
You ask your tax return preparer to submit your tax return just before the due date. The tax preprarer does. The tax preparer e-Files the tax return on the last day. You do not know your IP PIN or, more commonly, you are not even aware you have an IP PIN requirement for your tax return. The IRS takes several hours to confirm the submission back to your tax preparer. This may not even be done by the IRS until the next day. Regardless, the tax preparer notices that the IRS rejected the IP PIN. At least one day has passed, so the time for timely filing the tax return has now passed.
The question is whether the tax return that the IRS rejected is a valid tax return? This has a number of implications, such as whether the tax return was filed late and late filing penalties apply.
It also dictates when the IRS’s assessment period starts running. If it runs from the date of the rejected return, the IRS may miss its deadline for assessing additional tax.
The Fowler v. Commissioner, 155 T.C. 7, case addresses this scenario. The question was whether the IRS missed its deadline.
By raising this question, the IRS’s attorneys unwittingly raised an issue in this case that could cause a number of problems for the IRS going forward.
Facts & Procedural History
This dispute involved the 2013 tax year. The taxpayer engaged a CPA firm to assist with the tax return.
The CPA firm filed a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, one day before the due date. So the tax return was on extension.
The taxpayer signed a Form 8879, IRS e-file Signature Authorization, to authorize the CPA firm to e-File his tax return. This form authorized the CPA firm to e-File his tax return.
The CPA firm e-Filed his 2013 tax return on October 15, 2014. This was the extended due date. The CPA e-signed the tax return with a Practitioner Personal Identification Number (PIN). The CPA’s tax software returned a Submission ID, which is a “globally unique 20 digit number assigned to electronically filed tax returns.” But the e-Filed return was rejected as it did not include an Identity Protection Personal Identification Number (IP PIN).
The CPA firm paper filed the return again on October 15, 2014, October 28, 2014. He e-Filed the return again on and April 30, 2015. Each paper and e-Filed return included the same information, but the last submission included the IP PIN. The CPA was able to obtain this number so he included the number. The IRS only accepted the final e-Filed return.
The IRS issued a notice of deficiency to the taxpayer on April 5, 2018.
The taxpayer filed a tax court petition to challenge the notice as not being timely issued. The court was asked to determine whether the IRS issued the notice timely.
The IRS’s Tax Assessment Period
The IRS has three years from the filing of a tax return to assess additional tax for that tax return. This requirement is found in Sec. 6501. The IRS also has to issue a notice of deficiency to the taxpayer at its last known address during this time period.
To start the assessment period, one has to actually file a tax return. There are rules that say when a tax return is filed, such as the mailbox rule. These rules are not at issue in this case. This case also did not address the court cases saying that PDF records are not sufficient to show whether a document was filed with the IRS, when the IRS’s records did not reflect the receipt of the document.
In this case, the tax return was first e-Filed on October 15, 2014. If this return was valid, the IRS had until October 15, 2017 to issue the notice. It did not issue the notice until April 5, 2018.
The return that the IRS accepted was e-Filed on April 30, 2015. If this was the valid return, the IRS had until April 30, 2018 to issue the notice (there may have been a few more days under the rules, but that issue isn’t relevant here). The IRS notice would have been timely if this return was the valid return.
This raises the issue as to what return is valid for starting the assessment period?
What is a Valid Tax Return?
The courts have set out several factors that dictate what counts as a valid tax return.
These factors are referred to as the Beard factors. The name comes from the court case that first announced the factors.
The Beard factors say that a tax return is a document that:
- Purports to be a return and provide sufficient data to calculate tax liability,
- represents an honest and reasonable attempt to satisfy the requirements of the tax law, and
- that is executed by the taxpayer under penalties of perjury.
This tax dispute focused on the last factor, the signature factor.
What is a Valid Signature?
The court noted that there is little guidance as to what counts as a signature for an e-Filed tax return.
The tax preparer penalty regulations just say that the preparer is to “electronically sign the return in the manner prescribed by the Commissioner in forms, instructions, or other appropriate guidance.”
The IRS’s instructions for the tax return say that the taxpayer “must sign the return electronically using a personal identification number (PIN)”, either a Self-Select PIN or a Practitioner PIN.” The CPA e-Filed the first return and included a Practitioner PIN.
In this case, the IRS argued that an IP PIN is a signature on an e-Filed return and, since the e-File did not include an IP PIN, the first return that was e-Filed was not a tax return.
The court did not agree with the IRS:
[W]e disagree. Just as taxpayers must comply with instructions referenced on IRS forms, the IRS cannot disavow the 2013 Form 1040 instructions to accommodate its litigation stance. In this case, whereas the 2013 Form 1040 Instructions definitively identify the Self-Select PIN and the Practitioner PIN as the means of signing an electronic return, they provide no explicit indication that the IP PIN is part of the signature.
The court held that the IP PIN may be required, but it is not part of the signature for the tax return. Thus, the e-Filed return that was rejected by the IRS was effective to start the assessment period. The result was that the IRS’s notice of deficiency was not timely filed.
Failure to File Penalties
While this case involves a late notice of assessment, this same rationale would apply to the failure to file penalties. Since the rejected return is actually a return, it would seem that the IRS cannot impose late filing penalties when the taxpayer eventually files his tax return.
This raises a very difficult procedural question for the IRS. Specifically, how is the IRS to know when to assess the failure to file penalties? The IRS might be hard pressed to know that a rejected e-File return was submitted and rejected based on a missing IP PIN. If it knows this, it should not impose failure to file penalizes.
The IRS’s process is not really set up for this. The IRS assesses failure to file penalties automatically when the return is eventually filed. The IRS probably does not have a way to track the returns that are submitted and rejected based on the missing IP PIN. Thus, it probably cannot match those rejected e-Filed returns to its tax return processing function to check whether the failure to file penalties should be assessed. Likely, the IRS will just continue its current practice of automatically assessing failure to file penalties.
This presents a situation where taxpayers may need to submit penalty abatement requests.
This will come as good news to tax preparers who find that the IRS did not accept their timely-filed returns that were e-Filed on or around the due date.
It leaves the question open as to whether every taxpayer should sign up for an IP PIN just in case they think they may have to file their tax return late? By doing so, can the taxpayer buy additional time to submit their tax return while avoiding the failure to file penalty in its entirety?
That question could be a problem for the IRS.
If There Are No Subsequent Filings
This case also raises the question as to what happens if the taxpayer’s e-Filed return is submitted and rejected, but the taxpayer never files another return?
This would be the same facts as in this case, but if the taxpayer had not self-assessed any tax by filing the last tax return? In that case, the taxpayer would not have any tax assessed.
If the IRS does not act to file a substitute for return in the next three years, which it might not know it needed to do, the taxpayer might not have to pay any taxes.
Take the case of a Schedule C taxpayer who transacts their business in cash. The IRS might not ever be apprised of the need to file a substitute for return. Yet, the rejected e-File would preclude further assessments if the IRS did not do so within three years.
That is a big problem for the IRS.
What About Refund Claims?
The same concept may apply to refund claims as well. The rejected e-Filed return would start the time period for the taxpayer to submit refund claims.
The IRS may not know of the rejected e-File return. For example, the IRS may think there is an unlimited period of time for a refund claim as there was no prior return filed. This could result in the IRS issuing refunds to taxpayers long after the statute for paying refunds has expired.
This could be a problem for the IRS too.
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