VIBIR Returns Processed by the IRS Triggered the Limitations Period (Coffey Hulett, TC)

first_imgAn IRS deficiency notice sent to a married couple living in the U.S. Virgin Islands (V.I.) was untimely. The IRS failed to assess the deficiencies within three years from the date the VIBIR sent the taxpayers’ returns to the IRS. The VIBIR returns processed by the IRS triggered the limitations period.BackgroundThe taxpayers timely filed their returns with the V.I. Bureau of Internal Revenue. The taxpayers filed returns with the VIBIR because they believed they were bona fide residents of the V.I. Then, the VIBIR sent the couple’s Forms 1040 plus their Forms W-2 to the IRS under an information-sharing agreement. However, the VIBIR did not send the IRS any of the Form 1040 supporting schedules. Eventually, the IRS’s Philadelphia Service Center (PSC) received the documents and used the forms to create an account transcript, populating it with information from the forms.The IRS argued that the Forms 1040 plus the couple’s W-2s lacked enough information to be valid returns. Also, the Forms 1040 lacked original signatures because the VIBIR scanned the forms and sent them electronically to the IRS.Valid ReturnsTo be valid, a return must:contain sufficient data to calculate tax liability,purport to be a return,be an honest and reasonable attempt to satisfy the requirements of the tax law, andbe executed under penalties of perjury.Moreover, to start the limitations period, the return must be (1) properly filed and (2) the return the taxpayer is required to file. Accordingly, since the taxpayers did not file returns with the IRS, unless the VIBIR’s information sharing with the IRS amounted to “filing a return” the limitations period remained open.Sufficient Data The returns the IRS received had enough information for the IRS to create a transcript of account. The account transcript contained mostly zeros. However, the returns the IRS received from the VIBIR contained more information that a zero return, which the IRS argued the taxpayers should have filed. The forms reported the taxpayers’ gross income, deductions and credits. Further, the missing schedules did not prevent the computation of the couple’s tax liability.The Forms 1040 the taxpayers sent to the VIBIR were identical to the Forms 1040 used by the IRS. Therefore, the IRS got the information it required on the forms it created. There was sufficient information to process the returns and open an audit.Purported ReturnThe taxpayers believed they filed a return under Code Sec. 932(c) when they sent the returns to the VIBIR. They may have been wrong about where to send their returns, but they intended to file a return. Moreover, at least parts of their returns ended up in the right place, the Philadelphia Service Center. Moreover, under Code Sec. 932, filing a V.I. return is part of a taxpayer’s federal tax filing obligation.Honest, Reasonable AttemptThe taxpayers’ returns showed an objective attempt to report income and deductions. The returns were not typical tax protestor returns; they broke down the couple’s income, deductions, exemptions and credits. Even if the taxpayers were not entitled to their claimed V.I. credit, that makes the item erroneous. It does not make the form itself objectively unreasonable. A return does not need to be perfect to start the limitations period running.Further, a taxpayer who is a bona fide V.I. resident need file only with the VIBIR. However, if the taxpayers were not VI residents, they were supposed to send a completed return to the IRS. Nevertheless, the IRS argued that the taxpayers should have sent protective zero returns to start the limitations period. Therefore, the couple’s forms reporting all income and deductions were a reasonable attempt to satisfy their reporting obligations.Original Signature RequirementFinally, the IRS argued that the forms it received from the VIBIR were not valid returns because they did not contain original signatures. However, there is no statutory authority that requires original signatures on returns; returns must be signed under penalties of perjury. Further, the IRS did not receive the forms from just anyone. The IRS received the forms from the VIBIR, the official revenue agency of a U.S. possession. In addition, it was undisputed that the VIBIR accepted the couple’s forms as valid returns and shared them with the IRS under a longstanding information-sharing agreement. Therefore, the forms complied with the IRS’s rules sufficiently to constitute returns for limitations purposes.Related decision at CA-8, 2011-2 ustc ¶50,742.M. Coffey Hulett, 150 TC —, No. 4, Dec. 61,113 Login to read more tax news on CCH® AnswerConnect or CCH® Intelliconnect®.Not a subscriber? Sign up for a free trial or contact us for a representative.last_img

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