The “Effective Date” for Tax Rules

At the end of every tax statute, there is language that specifies when the new tax rule is effective.

Given the frequency with which Congress enacts new tax laws, often several times every year, one might think that there is no dispute as to the “effective date” language that it uses. One might think that the language is standard across all tax statutes.

The language is not standard. While there are several variations of provisions that Congress reuses, but the effective date language differs between statutes.

One common provision specifies that a tax law applies when it is passed or enacted into law. This can lead to questions about whether the new law applies to past conduct that is either reported on a tax return filed after the law’s enactment or that the IRS does not address until after the enactment date.

The recent case of Couturier v. Commissioner, 162 T.C. 4, addresses this very question. It involves a new taxpayer-friendly rule that limits the timeframe for the IRS to assess tax on excess IRA contributions. The taxpayer in this case argued that the new rule applied to a tax year that predated the law. As explained below, whether or not the rule applies retroactively can substantially impact the amount of tax potentially due.

Facts and Procedural History

This case involves a retired corporate executive. As part of a $26 million corporate buyout package, the taxpayer contributed retirement assets from various deferred compensation plans into his individual retirement account (“IRA”).

The IRS subsequently audited the taxpayer’s personal income tax returns for 2004-2008. Based on its determination that $25 million of the retirement account rollover contribution was ineligible for tax-deferred treatment, the IRS concluded that the taxpayer had made an excess contribution to his IRA. The IRS proposed to assess excise tax under Section 4973 for the excess contribution to the IRA. The IRS did not make this determination until 2016—more than a decade after the fact.

The issue ended up in the U.S. Tax Court and was finally decided in 2024. The court had to decide whether the IRS had the authority to assess excise taxes on the alleged excess retirement account contributions made in 2004-2008—twenty years after the fact.

Statutes of Limitations Framework

The IRS generally must assess taxes within 3 years of the tax return filing. This is the timeframe Congress gave the IRS to conduct audits.

The IRS rarely complies with this rule. Most IRS audits are not conducted timely. IRS auditors often insists on receiving an extension and coerces taxpayers to grant the requests by threatening to assess tax that is not owed or denying administrative appeals rights that the taxpayer is entitled to under due process laws. Setting aside the propriety of this practice by the IRS, it is common and comes up in nearly every IRS audit.

Even then, there are nuances to the three-year rule. One nuance, and frequent argument raised by the IRS, is what document can qualify as a tax return for purposes of starting the statute of limitations running. The IRS can be so disagreeable that it will not even accept a document as a tax return. And there are other rules. For example, there are other rules that extend the time for the IRS to audit when there is taxpayer fraud, a substantial omission, etc.

The 6-Year Statute for IRA Contributions

This case focuses on the new rule that creates a 6-year limitation period for excise taxes involving IRAs.

Under this new rule, when no IRS Form 5329 is filed detailing the excess retirement contribution but an income tax return is filed (or if an income tax return is not required to be filed), the IRS has 6 years to conduct an audit and assess this excise tax.

So, like the facts in this case, the new rule would apply if the taxpayer files their IRS Form 1040 but does not attach a Form 5329 to the tax return to report the excess contribution and excise tax. This new rule makes sense. The whole idea of statutes of limitations is that they provide finality and allow all parties, both taxpayers and the government, to move on. One cannot plan their affairs if they are continually subject to liability or have liability exposure for long past events.

The Effective Date: Take Effect On

This new rule was enacted in 2022 and the statute says that the law change “shall take effect on the date of the enactment of this Act.” This would be on December 29, 2022.

Recall this case involved an excise tax for 2004-2008. If you stop there and only consider the tax years, there might not be a concern about the new rule. The rule would not apply to tax returns for 2004-2008.

This is where the tax court’s analysis stopped. The tax court concluded that the new rule does not apply given this “shall take effect on” language in the statute. But the phrase “take effect on” is not as clear as one may think.

The phrase “take effect on” is not tied to a tax year. It is also not tied to events that are outside of the statute being passed or enacted into law. This case provides an example of the difficulty in applying this phrase.

Tax Years Beginning After

Compare this “take effect on” phrase to the also common phrase “effective for tax years beginning after XXX.”

An example of this can be found in the Section 174 R&D tax law changes enacted as part of the Tax Cuts & Jobs Act of 2017:

Effective Date.–The amendments made by this section shall apply to taxable years beginning after December 31, 2017.

This alternative language makes it clear when the statute applies. Had this language been used by Congress for the new rule for the 6-year statute there would be no dispute here. It would also validate the holding from the tax court.

While Congress has used this “alternative “beginning after” language for numerous other tax statutes, it did not do so for this particular new rule. The fact that it did not choose this language suggests that Congress did not intend the law to apply prospectively. The tax court did not address this concept.

Presumption Against Retroactivity

The tax court did not agree that this language for the start date was ambiguous. Just in case its decision is reversed on appeal, the court noted that even if the language is ambiguous, the presumption against retroactivity justifies not applying the new rule retroactively.

Courts apply a presumption against retroactivity when new legislation would impair existing rights, increase liability for past conduct, or impose new duties on completed transactions. The tax court found the 2022 amendment has retroactive effect because it would abruptly shorten, from indefinite to 6 years, the IRS’s limitations period to assess taxes on the 2004-2008 transactions. The court then noted that applying the new rule to bar only prospective notices of deficiency does not retroactively impair government rights.

While the tax court concluded the presumption against retroactivity applies, it is difficult to square this with the facts in this case. The presumption against retroactivity applies to legislation impairing existing rights, increasing liability for past conduct, or imposing new duties regarding completed transactions. A statute curtailing government enforcement powers does not necessarily implicate these concerns. This presumption does not necessarily extend to rules limiting government enforcement powers.

Further, the new rule did not extinguish accrued rights since the IRS had not yet assessed tax before the law changed. The IRS retains the authority to assess tax after the conclusion of the tax court proceeding as prescribed by statute. The government’s rights would not have accrued until the assessment is made.

Also, restricting an enforcement timeframe, even significantly, does not mean a statute operates retroactively. The effect is on secondary conduct (issuing notices of deficiency) occurring after enactment, not completed primary conduct. The IRS’s past reliance interests in an indefinite assessment period merit little weight compared to taxpayers’ interests.

And it should be noted that the government could have avoided this by simply conducting a timely audit. Most taxpayers agree that someone in retirement should not have to wait until 20 years into their retirement to find out that they owe a large tax balance to the IRS for their IRA. This is particularly true when an income tax return was filed and the IRS had all of the information necessary to make this determination decades prior to the time it did so.

The Takeaway

Tax laws change yet old disputes and audits persist, as the taxpayer in this case recently discovered. Despite a new statute meant to shield taxpayers after 6 years, the language Congress used to enact the law precluded the new rule from applying in this case. The consequence of the “effective date” language was substantial. It resulted in a massive IRA tax bill stemming from a 20-year-old contribution. As this case shows, one has to consider the effective date when applying tax laws.