The IRS manages to lose a lot of mail. To be fair, some of the mail is likely lost before it even gets to the IRS. When this happens, can the taxpayer lose out on their rights? The court revisits this issue in Baldwin v. United States, 17-55115 (9th Cir. 2019).
Facts & Procedural History
The taxpayers incurred a $2.5 million loss in 2007. They intended to carry the loss back to offset income taxes in 2005. The taxpayers assert that they mailed an amended tax return to the IRS in June of 2011. The IRS asserts that it never received the amended tax return.
The taxpayers submitted the amended return to the IRS again and the IRS received the second submission. The IRS rejected the claim by asserting that the refund claim was mailed too late. Litigation ensued.
The trial court concluded that the taxpayer was entitled to a refund. The IRS appealed the decision, which is the subject of this post.
Time for Filing Refund Claims
Taxpayers generally have three years from the filing of an original return, to file an amended return to recoup amounts from the original return.
When it comes to net operating losses that are carried back, the three year period generally starts running from the year that triggered the net operating loss carryback.
Thus, in this case, the original amended return would have been submitted to the IRS timely. But the IRS did not receive that return. The IRS received the second amended return, but it was mailed to the IRS after the three year time for filing a refund claim.
The Mail Box Rule
The trial court considered the mail box rule. This rule says that certain documents mailed to the IRS are timely, even though they are received by the IRS late.
The mail box rule is found in Sec. 7502. Before this section was enacted, there were court cases that also provided support for a mail box rule. The mail box rule in Sec. 7502 is stricter than the court-created rule.
In this case, the trial court applied the more lenient common law or court-created mail box rule. It reasoned that Sec. 7502 was not intended to replace the common law rule, but rather to supplement it.
On appeal, the appeals court reaches the opposite conclusion. It concludes that Sec. 7502 replaced the common law rule.
Why Does This Matter?
The Treasury Department has issued regulations interpreting Sec. 7502. These regulations essentially say that the taxpayer has to keep proof of registered or certified mail to take advantage of the mail box rule. The common law mailbox rule does not have this limitation.
In this case, the taxpayer apparently did not send the first amended tax return to the IRS via registered or certified mail. The result is that the taxpayer did not file a timely refund claim, which in turn precluded the taxpayer from litigating the matter.
To answer the question posed in the title to this post, the answer is that taxpayers might not care if the IRS lost their mail as long as they have proof of timely mailing. To the extent taxpayers do not have this proof, they should care about the IRS losing their mail.