Tax Return “Filed” When Provided to IRS Employee

Since tax returns are a central part of our system of tax administration, one would think that the IRS is an expert at handling tax returns. It isn’t.

The IRS often loses tax returns. It often checks returns into its systems and then fails to process the tax returns and cannot locate the actual tax returns to process them. And no, this is not due to a backlog due to the Covid-19 situation. The IRS has a long track record of losing tax returns. One only has to look at the volume of tax disputes involving the mailbox rules to get a sense as to how common this is. This occurs when taxpayers mail tax returns to the IRS, when they e-File tax returns with the IRS, and even when they hand-deliver tax returns to the IRS.

Perhaps the most frustrating situation is where a tax return is provided to IRS employees several times, the taxpayer has proof that the return was provided to the IRS, and the IRS still fails to acknowledge that the tax return was filed. This is very common, particularly with certain types of IRS employees, such as IRS revenue officers. Revenue officers handle collection cases and are instructed to secure delinquent returns as part of collections. They have a knack for losing tax returns…. IRS agents, attorneys, and others do the same, but in my experience, they do so with less frequency.

This is the fact pattern in Seaview Trading LLC v. Commissioner, No. 20-72416 (9th Cir. 2022). The taxpayer settled the actual tax issue in the case, but reserved the right to challenge whether it filed its tax return by providing it to IRS employees as directed by the employees.

Facts & Procedural History

This case involves a partnership that was owned by two LLCs. One of the LLCs owned a 99% interest and the other the remaining 1%.

The taxpayer asserted that a partnership tax return for 2001 was filed in July of 2002. In 2005, the IRS agent who was auditing the taxpayer sent a letter saying that no tax return had been received for 2001. The taxpayer’s CPA promptly faxed the IRS agent a copy of the tax return and proof of mailing.

In 2007, the taxpayer’s attorney sent a copy of the 2001 partnership return to the IRS attorney assigned to the case.

In 2010, more than three years after the last tax return was provided to the IRS, the IRS issued a partnership adjustment notice to the taxpayer.

The taxpayer filed suit in U.S. Tax Court arguing that the IRS’s proposed assessment was time barred.

The IRS’s Time for Making Adjustments

The general rule is that the IRS has three years from the date the partnership tax return is filed to make an adjustment for the partnership or an affected item.

One of the exceptions to this rule is when a tax return is not filed. The clock does not start running on the IRS’s time for making an adjustment if no tax return is filed.

The U.S. Tax Court accepted the fact that the tax return was provided to the IRS in 2005 and again in 2007. Thus, the only question was whether providing the tax return to the IRS auditor or attorney is sufficient for the return to have been filed.

When is a Tax Returned “Filed”?

The regulations say when a tax return is filed. Specifically, for partnership tax returns, they say that the return is filed when it is filed at the designated place of filing returns.

The regulations then point to the service center provided in the relevant IRS guidance, publications, instructions, or forms.

The instructions for partnership tax returns say that the tax return was to be filed with the IRS Service Center in Ogden, Utah.

The taxpayer cited prior court precedent that said that hand-delivering a tax return to an IRS special agent was sufficient for the tax return to be filed. The U.S. Tax Court noted that this prior case:

did not create a blanket rule that a taxpayer can file a return by whatever method he chooses; nor did it create an additional place for taxpayers to file returns beyond the places specifically designated in the Code or the regulations.

Because the return was not filed in the place designated by the IRS, the U.S. Tax Court concluded that the return was not filed. The tax court granted the IRS’s motion for summary judgment.

Delinquent Tax Returns Are Different

This brings us to the taxpayer’s appeal. The Court of Appeals for the Ninth Circuit heard the appeal.

It held that “when (1) an IRS official authorized to obtain and receive delinquent returns informs a partnership that a tax return is missing and requests that tax return, (2) the partnership responds by giving the IRS official the tax return in the manner requested, and (3) the IRS official receives the tax return, the partnership has “filed” a tax return for § 6229(a) purposes.”

The appeals court reached this holding by noting that the regulations only apply to timely-filed tax returns. This tax return was filed late. Since it was late, it is accepted practice to provide the late-filed tax return to the appropriate IRS employee.

The Takeaway

You think it will never happen to you. But chances are that the IRS will lose one or more of your tax returns. The odds go up for delinquent tax returns. This is particularly true if you are faxing or mailing the tax return to an IRS employee rather than the IRS service center. If you are really unlucky, the IRS may lose your tax return and then even correspond with you by sending notices to the wrong address.

This court case should be cited by taxpayers when the IRS employees lose their tax returns. This is particularly true when, as in this case, the IRS fails to process a tax return provided to the IRS employee and later tries to make an adjustment to the tax return. If the assessment period has expired, the taxpayer should consider their options. This may include bringing suit, as the taxpayer did in this case, filing a claim or submitting an offer based on doubt as to liability.