A properly and timely e-filed tax return triggers limitation statute

On Sept. 9, 2020, the U.S. Tax Court decided in Robin J. Fowler v. Commissioner, 155 T.C. No. 7 (2020) that an e-filed Form 1040 commences the three-year period of limitations on assessment and collections under sec. 6501(a) even though the return was rejected by the IRS for want of the taxpayer’s identity protection (IP) PIN. The unanimous Court analyzed the submission and concluded that the IRS had not published any guidance requiring an IP PIN to be part of an approved e-filing signature method (noting that their decision does not address whether the IRS may make it part of the signature method, only that it is not a requirement for the tax year at issue).

The taxpayer in Fowler, engaged a tax professional to e-file his 2013 Form 1040. The tax professional e-filed the return on Oct. 15, 2014, within an approved extension to file. The tax professional obtained signature authorization on Form 8879 to file the return as an electronic return originator (ERO). The tax professional used a preparer PIN to e-sign. The IRS rejected the submission and issued a rejection notice citing code “IND-181” for failure to provide a valid IP PIN.  The return was ultimately electronically accepted on Apr. 30, 2015. On Apr. 8, 2018, the IRS issued a statutory notice of deficiency (SNOD) to the taxpayer for tax year 2013. The taxpayer argued that the SNOD was invalid as a matter of law because it was issued outside the three-year assessment statute, which expired three years from the date of the initially rejected submission. The IRS argued that the SNOD was valid because it was issued within three years from the accepted submission date. The IRS generally has three-years from the date a return is filed to assess tax imposed by the code under sec. 6501(a).

Sec. 6501(a) further states that the three-year limitation commences when a taxpayer files a “return required to be filed.” The code does not further define what constitutes a return or what constitutes proper filing. The parties conceded that the initial return was filed and so the Court focused its analysis on whether the Oct. 15, 2015 submission was a return under the well-established ‘Beard’ test, announced in Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986).

Under Beard, a document constitutes a return if it:

(1) purports to be a return and provides sufficient data to calculate tax liability,

(2) shows an honest and reasonable attempt to comply with the tax law, and

(3) is executed under penalties of perjury.

The Court easily concluded the first two prongs were satisfied and turned its attention to the signature. Sec. 6061(a) requires a return to be signed in accordance with prescribed forms and regulations. Reg. sec. 1.6695-1(b)(2), directs that a tax return preparer electronically sign a return in accordance forms, instructions, or other appropriate guidance. The Court noted that the 2013 Form 1040 stated that a taxpayer can sign an electronic return by using ‘a’ personal PIN—either a self- selected PIN or a practitioner PIN.  Because the taxpayer in Fowler properly executed the return, and there was no other IRS guidance that would require an IP PIN as part of the signature, the Court found that the Oct. 15, 2014 submission was a proper filing of a return and commenced the three-year limitations period, even though the IRS had rejected it.

One take-away from this significant opinion is that even if a taxpayer’s timely e-filed tax return is rejected such filing can still trigger the 3-year assessment statue. In Fowler, the return was rejected because it lacked an IP PIN. However, a return can be rejected for other irregularities that might not cause the e-filed return to fail the Beard test. Thus, a rejected tax return that satisfies the Beard test can trigger the assessment statute, impact the validity of the statutory notice of deficiency and can trigger the three-year statute for filing a refund claim under sec. 6511.  Taxpayers and practitioners should also take note that the Court pointed out that the IRS has no published guidance making a taxpayer’s IP PIN or custom PIN part of the signature requirement. It is possible the IRS could provide such guidance in the future.