ABA Section of Taxation Seeks Longer Time Period to Mail Rejected E-Filed Returns

December 15, 2017

William M. Paul,
Acting Chief Counsel and Deputy Chief Counsel (Technical)
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20024

Re: Timeliness of Electronic Tax Return after Failed Transmission

Dear Mr. Paul:

On November 7, 2017, representatives of the Section of Taxation of the American Bar Association (the “Section”) met with you and other Service and Chief Counsel officials. One of the items discussed was the application of the section 6651 failure to file penalty when a taxpayer timely attempts to submit a tax return electronically, the transmission fails, and the taxpayer then later submits the return after the due date for the return.¹

We are writing in response to your question regarding the impact on the situations we described of Internal Revenue Manual provision 20.1.2.1.1 (the “10-Day Rule”), which states:

CFR 301.7502-1(d) provides that IRC § 7502 also applies to timely electronic postmarks for e-filed returns, and that all conditions above are considered met if the return was transmitted via an authorized electronic return transmitter and received by IRS in processable form. E-filed returns with a timely electronic postmark that are rejected by IRS's e-file system are considered timely if they are mailed (or re-transmitted) within 10 days of initial notification of rejection.²

We appreciate the Service's past efforts to provide relief through this provision when an electronically filed (“e-filed”) return is rejected, but we believe that the increased use of e-filing — which the Service has strongly encouraged for years — requires broader relief to avoid inequitable results, particularly for low income and elderly taxpayers who may not have ready access to their return preparers. We thank you for your consideration of this issue and your willingness to discuss it further. The views expressed below are presented on behalf of the Section of Taxation. They have not been approved by the House of Delegates or the Board of Governors of the American Bar Association and, accordingly, should be construed as representing the position of the Section and not the Association.

The 10-Day Rule principally applies to individuals and businesses filing at the end of the filing period because taxpayers who e-file early in the filing season may have weeks or months to resubmit following a failed transmission. We focus here on individuals, particularly low-income individuals who receive free tax preparation assistance through the Service's Volunteer Income Tax Assistance (VITA) program including the VITA sites run by the American Association of Retired People (AARP) and the Tax Counseling for the Elderly (TCE) program.

Individuals filing near the return due date are more likely to show an amount due on their returns because individuals anticipating refunds often file early in the season to obtain their refunds. Taxpayers who file close to the due date and claim a dependent also are more likely to experience an e-file rejection because of the increased likelihood that another individual attempting to claim the same dependent has already filed. For these reasons, taxpayers who have their returns e-filed by VITA, AARP or TCE sites near the end of the filing season will have an increased chance of owing additional tax (and thus be subject to the failure to file penalty), and their returns are also more likely to be rejected for electronic filing due to a duplicate social security number of a dependent or other interrelated issues.

When a taxpayer believes he or she is entitled to claim a dependent and the return is rejected because of a duplicate claim of the dependent's social security number, it is the experience of our members that the taxpayer may not immediately want to remove the claimed dependent from the return. Rather, the taxpayer may want to investigate and resolve the duplication which is often rooted in complicated family dynamics. The taxpayer also may not want to file a paper return and face an almost certain audit because of the duplicate claim of the dependent. As this example shows, the resolution of a rejected electronically filed return is not always simply an issue of refiling the return. Sometimes the problem requires an investigation and decision-making. This adds a layer of complexity in addition to the delay inherent in rescheduling with a tax assistance site.

A small percentage of VITA, AARP and TCE sites operate year-round; however, the majority are only open during the filing season. Sites that operate only during the filing season may have very limited hours and volunteer availability once the filing season ends. If a return filed near the end of the filing season is rejected, we believe that all VITA, AARP and TCE sites strive to notify that individual of the rejection and to assist in refiling electronically or in paper format. Discussions that the Section's members have had with these taxpayer assistance sites suggest that the process for sites to identify the transmission failure, notify the taxpayer, and schedule the taxpayer to return for assistance during the limited operating hours, often lasts more than ten days from the date of the original return transmission. Although there may be many reasons for a delay in refiling in excess of ten days, the availability of a VITA, AARP or TCE site to assist the taxpayer in rectifying the error is an important consideration which is outside of the taxpayer's control.

The returns rejected by the electronic filing system are almost always valid returns under the standard definition of validity applied to paper filing under the four-pronged test set forth in Beard v. Commissioner, 82 T.C. 766 (1984). The Service wants to encourage electronic filing, in fact it provides tax preparation software for free to all VITA and TCE sites, and we believe that it does not and should not want to unnecessarily penalize individuals who have taken the steps to have a valid return prepared and submitted. For these reasons, we believe that the 10-Day Rule should be expanded, but we also recognize the Service's need to receive the return within a reasonable time frame.

The decision of what constitutes a timely return also has consequences beyond the imposition of the failure to file penalty. Several circuit courts have ruled that someone who files a return late, even by one minute, can never discharge the tax liability on that return.³ Other collateral consequences of late filing also exist, such as failure to meet the compliance obligation of an offer in compromise.

At our meeting, we shared with you the opinion in the case of Haynes v. United States now pending in the Fifth Circuit. Since the meeting, the American College of Tax Counsel has filed an amicus brief in that case. Below is an excerpt from that brief, which is attached in its entirety, which sets out why the electronic filing of a return is different from simply mailing a paper return.

Since the first electronic filing pilot program in 1986, the U.S. Government has progressively promoted the filing of tax returns by electronic transmission over paper submissions. The U.S. Government has determined that it and taxpayers receive benefits from the electronic transmissions that would not be received with paper submissions, and, therefore, the U.S. Government has adopted policies that actively promote, and sometimes require, electronic filing of tax returns. See, e.g., Pub. L. No. 105-206, § 2001, 112 Stat. 685, 723 (1998) (adding inter alia 26 U.S.C. § 6011(f)); Internal Revenue Service, Fact Sheet: IRS E-File: A History, FS-2011-10 (June 2011). The electronic filing of tax returns has been incorporated into the Internal Revenue Code and is generally required for a growing number of taxpayers. See, e.g., 26 U.S.C. § 6011(e); Notice 2011-26, 2011-17 I.R.B. 720. Reflecting the growing complexity of the income tax laws, a significant number of taxpayers seek the assistance of professional tax return preparers, many of whom are presumptively required to file returns electronically. See Internal Revenue Service, Electronic Tax Case: 17-50816 Document: 00514250000 Page: 12 Date Filed: 11/27/2017 Administration Advisory Committee, 2017 Annual Report to Congress 41 (June 2017); Notice 2011-26, 2011-17 I.R.B. 720.

The electronic filing of a tax return is not a simple, ministerial task like the transmittal of a paper return to the IRS by a specified due date. Rather, electronic filing requires the use of specialized computer software programs, Authorized IRS e-file Providers and, sometimes, the assistance of a professional tax preparer, such as a certified public accountant or an attorney. Additionally, individual taxpayers do not have the means to personally transmit electronic returns to the IRS, as they do with paper returns by depositing them with the U.S. Postal Service or a private delivery service designated by the IRS. See 26 U.S.C. § 7502(f)(2). Instead, taxpayers must rely on third-party Authorized IRS e-file Providers to transmit their tax returns to the IRS. Similarly, there is not a readily available method for a taxpayer to personally verify that his or her tax return was received by the IRS, as a taxpayer could do if he or she requested delivery confirmation from the U.S. Postal Service or a designated private delivery service. Instead, a taxpayer who e-files his or her return must generally rely on an IRS-authorized third-party transmission provider to confirm delivery.⁴

We believe that the vast majority, if not almost all, of the rejected electronic returns are valid returns of taxpayers who made a good-faith effort to timely file. Again, we recognize the Service's effort to provide relief for rejected returns through the 10-Day Rule, but we recommend that the rule be expanded to thirty days to avoid penalizing taxpayers who are not able to avail themselves of this relief. If the Government's objective is to continue to encourage e-filing, then it should put a return that a taxpayer attempts to e-file (even if rejected) on par with a paper return that is mailed, and expanding the 10-Day Rule would accomplish this while still respecting the Service's need to obtain the return in a timely fashion. This change could be accomplished through a revision to the Internal Revenue Manual or through other guidance made available to the general public (for example, the instructions to Form 1040 or guidance published in the Internal Revenue Bulletin). We also request that the Service give consideration to allowing taxpayers who file returns after rejection of their timely attempt to e-file be given the opportunity to argue reasonable cause with respect to any asserted penalty, with factors established for safe harbors.

We thank you for your time and attention to this important matter affecting taxpayers of all types and would look forward to meeting with you and your staff to discuss these issues further.

Sincerely,

Karen L. Hawkins
Chair, Section of Taxation

cc:
Hon. David Kautter, Assistant Secretary (Tax Policy), Department of the Treasury
Drita Tonuzi, Deputy Chief Counsel (Operations), Internal Revenue Service
Thomas West, Tax Legislative Counsel, Department of the Treasury
Katherine Zuba, Director, Exempt Organizations, Tax Exempt & Government Entities Division, Internal Revenue Service