Tax returns are an annual drudgery, but they are important. They are important for individuals, companies and investment entities. Everyone must submit one, or more than one, depending on how many entities you have. You may also have to file state taxes. You may think your filing date is a no-brainer, and hopefully before the deadline. The one everyone knows is April 15. Of course, that date moves around a bit, like for 2021 returns, when the due date was April 18, 2022. Business entities face other due dates. So what's the problem when you file a return? Test for one thing. It may be important to show when you filed because of the statute of limitations. Wouldn't it be nice to tell the IRS, "Sorry, it's too late to audit me?" The general federal tax statute of limitations runs three years after you file your tax return. But there are many exceptions that give the IRS six years or more. But starting with the normal three years, how do you count that? If your tax return is due on April 15 but you file it early, the statute takes effect exactly three years after the due date.
There are plenty of IRS statute of limitation rules and tips here. Early filing does not start three years earlier. If you get an extension until October 15 and file it at that time, your three years run from then. On the other hand, if you file late and do not have an extension, the statute runs three years after your actual (late) filing date. With California tax returns, the state gets an extra year, four years from filing. See more tips on the California statute of limitation and disputes.
If you somehow end up filing your return with the IRS late, days or even years late, you want to measure that IRS three years from your actual filing. In audits and tax disputes, your actual filing date can become critical. A great recent example is the 9th Circuit tax case of Seaview Trading LLC et al. v. Internal Revenue Commissioner, No. 20-72416 (9th Cir. May 11, 2022). The IRS proposed a $35.5 million tax bill to this California-based company. Seaview went to US Tax Court saying it was wrong, arguing that the IRS had time-barred. But the Tax Court agreed with the IRS. On appeal, the Ninth Circuit pushed back on the IRS.
And it all came down to the filing date of the tax return. In 2005, the IRS was requesting Seaview's 2001 tax return, and Seaview submitted it to the IRS in 2005. But the IRS didn't issue a tax bill until 2010, more than three years later. Essentially, the IRS position was that giving the return to the IRS auditor was not "filing." Hey, you're supposed to file it at the designated IRS Service Center for your area. That's the only thing that counts as a "filing," the IRS said.
The mess started in 2002. Seaview thought he filed his 2001 corporate income tax return in July 2002, but the IRS has no record of receiving it. In 2005, the IRS said it had no record and an IRS agent asked for a copy. Seaview faxed a signed copy. The following month, the same IRS agent told Seaview that the 2001 return was being audited. The agent asked for more information, including more copies.
In 2006, Seaview's accountant told the IRS in an interview that he had previously provided a signed tax return and submitted a copy as an exhibit. In 2007, Seaview's attorney mailed another signed copy of the 2001 return to an IRS attorney. That all sounds pretty reasonable, doesn't it? Then in 2010 the IRS issued a big bill, wanting millions. Seaview went to Tax Court and said it was too late. But the Tax Court ruled in favor of the IRS, holding that Seaview had not “filed” a tax return when it faxed a copy to the IRS agent, or even mailed a copy to the IRS attorney. Those were not "refunds," the Tax Court said. So Seaview appealed, and the 9th Circuit thought the IRS was playing too cute.
Judge Bumatay said, "The IRS views the law in one way as an internal matter and in another way as an advantage in litigation. We refuse to follow this twisted logic." The IRS had a hard time explaining an IRS memo that said taxpayers who are behind on their tax returns are encouraged to file their late returns directly with their auditor or revenue agent, not send them to the IRS Service Center! IRS!
After all, that seems to make sense, if an IRS auditor says "hey, where's your return? You have to file it", wouldn't you want to turn it in? The Ninth Circuit said the internal IRS guidance documents do not have the force of law, but "show that the IRS agrees that no regulation governs the 'filing' process for late returns and that it also follows the ordinary meaning of the term ".
Despite the IRS's arguments, the 9th Circuit said the tax code and IRS regulations do not stipulate the procedures a taxpayer must follow to properly file a late tax return. As a result, the Ninth Circuit said it would rely on the ordinary meaning of the term "file." "Based on the ordinary meaning of 'filing,' we hold that a delinquent partnership return is 'filed'...when an IRS official authorized to obtain and process a delinquent return requests such a return from a partnership, the partnership delivers the statement" as requested and the officer receives it, Judge Bumatay said.
You should be able to rely on IRS requests, especially in a case like this where Seaview did everything that was asked of it. The majority opinion of the Ninth Circuit said: "The IRS wants to have the ability to order taxpayers to file delinquent returns with its authorized officers, while maintaining the power to unilaterally decide whether the returns are 'filed' for statute of limitations. We reject this nonsensical position and instead follow the ordinary meaning of the Tax Code."
Is this an obvious decision? Hardly, and Seaview got a big win here. The Tax Court had an easy ruling for the IRS. And a harsh dissent in the Ninth Circuit went to the IRS. Disagreeing, Justice Bridget Bade said the Tax Court was always right. Clearly, he said, in violation of both IRS regulations and the tax code, Seaview failed to deliver its tax return to the proper service center: Ogden, Utah. That should be it.
In fact, Justice Bade said, "The effect of the majority decision is to exempt delinquent filers from the need to comply with the rest of the regulations," said Justice Bade. "Lawbreakers everywhere can rejoice when they learn that by breaking one part of a statute or regulation, the rest of the statute or regulation goes 'silent.'"
What is the lesson for all taxpayers? There are a couple of good lessons. The biggest is filing taxes on time, not late, and doing it the right way. I mean, if the instructions say send it to Ogden, do it, not Fresno. And when you apply, keep a good record of exactly when you applied, including electronic confirmation or proof of mailing and certified receipt. You want proof that you filed your return, when you filed it, and when the IRS received it.
You'd be surprised how terribly important these cleaning details can be. Keep these items in your permanent records, including good copies of all your statements. Never throw them away, ever. Keep good records and copies of all your correspondence with the IRS as well. It may be a good idea to refer back to the letters confirming exactly what the IRS told you to do. Even if the IRS doesn't send you a letter, you can help confirm your understanding in your own letter. It can have a kind of impeding effect in some cases. Unsurprisingly, tax disputes can be expensive. Do your best to avoid them, and when they are unavoidable, try to have your ducks in a row. For more tips, check out the 13 IRS Statute of Limitation Rules Everyone Should Know.