A recent decision by the 9th U.S. Circuit Court of Appeals provides a cautionary tale for taxpayers when it comes to ensuring that returns are properly filed with the IRS and that proof of filing is maintained. In its decision in Seaview Trading, LLC v. Commissioner of Internal Revenue, the 9th Circuit held that the taxpayer had not complied with the regulatory place-for-filing requirement when it provided the return directly to an IRS official rather than sending it to the Ogden Service Center as directed on the Form 1065, “U.S. Return of Partnership Income,” instructions. The court held that because the taxpayer failed to properly file its return, the statute on the period for the IRS’ ability to assess additional tax did not begin to run. As a result, IRS adjustments made years after the statute would have ordinarily closed are considered timely.
Background
The IRS generally has three years from the date a return is filed to assess additional tax. The period of limitations does not begin to run until a return is filed. In addition, a partnership is required to file its return with the service center set forth in IRS revenue procedures, publications, forms, or instructions to the forms. The instructions on the 2001 Form 1065 prescribed that the returns should be filed with the IRS Ogden Service Center.
The Seaview Trading, LLC case involved a partnership that believed that it timely filed its 2001 Form 1065 with the IRS Ogden Service Center in accordance with the form instructions. The partnership was contacted by an IRS revenue agent in 2005 and notified that the IRS did not have record of the partnership filing its 2001 return. The taxpayer responded that the return had been filed and faxed the revenue agent a copy of the partnership’s 2001 return along with a certified mail receipt. However, the certified mail receipt was for an envelope that also contained an unrelated return, and the partnership could not prove that its 2001 return was included in the envelope.
In July 2007, following the beginning of an IRS examination, the partnership’s representative mailed a copy of the 2001 return to an IRS attorney. Neither the revenue agent nor the IRS attorney forwarded the return to the IRS Ogden Service Center. In October 2010, the IRS sent the partnership a final partnership administrative adjustment (FPAA) with respect to the taxpayer’s 2001 return. The taxpayer challenged the FPAA as untimely. In its ruling in favor of the IRS, the 9th Circuit held that the taxpayer failed to comply with the regulation’s place-for-filing requirements because providing a return to an IRS official did not constitute filing the return. Therefore, because no return had been filed, the period of limitations had not begun, and the FPAA was timely.
Crowe observation
The conclusion in this decision was a surprise to many observers who previously believed that providing a copy of a return to an IRS official during an examination was treated as filing a return and started the three-year clock on the period of limitations.
Looking ahead
Seaview Trading, LLC provides a number of lessons for taxpayers regarding filing a federal tax return:
- Comply with all return-filing requirements, including sending the returns to the place designated by statute, regulations, or other guidance.
- Maintain copies of what is filed with the IRS.
- Avoid mailing more than one return to the IRS in the same envelope.
- Use certified mail or an authorized private delivery service to mail returns to the IRS and retain the certified mail receipt or other proof of mailing.
- When available, electronically file returns and retain copies of the acknowledgment of acceptance by the IRS.
- When providing an IRS official, such as a revenue agent, with a copy of a delinquent return, also file the return with the location specified by statute, regulations, or other guidance.
