The case of Reifler v. Commissioner recounts a simple mistake that got very costly for the taxpayers but also raises the issue of how should both the IRS and the taxpayers act when something about an original return requires fixing. On the facts here Judge Laro finds that the petitioners did not timely file their return for 2000. That failure became costly because of deficiencies determined by the IRS concerning the return during an audit.
Both petitioners worked and had business backgrounds. They relied on an accountant to prepare their return. The accountant prepared the return during the extended due date period and provided it to Mr. Reifler. Mr. Reifler signed the return and brought it home for his wife to sign. They had a practice of filing joint returns and the accountant had prepared a joint return. For an unknown reason she did not sign the return but he mistakenly or absent-mindedly thought she had. He mailed in the return with only his signature. The IRS sent them back the original return because of the lack of her signature. When they received the original return back from the IRS, petitioners did not, according to their testimony, receive correspondence with it explaining that the IRS sent it back for lack of a signature. They did not pay attention to the fact that the document return had red marks all over it and was the original return Mr. Reifler had sent to the IRS. They filed away the return and did nothing to address the unsigned return issue.
Several months later, petitioners received a notice from the IRS that they had not filed their 2000 return. In response to this notice, they printed and signed a copy of the original return and sent it to the IRS. The IRS treated this document as the original return and treated it as a late filed return. Two years later the IRS began an audit of 2000 and other years. For the first time during the audit the petitioners realized that the IRS had treated the copy as the original return. Petitioners still had the original return. They introduced the original return at trial although with some alterations.
Petitioners made two arguments concerning the validity of the original filed return while acknowledging that it omitted Mrs. Reifler’s signature. First, they argued that the original return substantially complied with the requirements for a valid return and should be treated as a valid and timely return. Second, they argued tacit consent, an argument usually reserved for circumstances where one spouse signs for both. The Tax Court rejected both arguments because of the lack of Mrs. Reifler’s signature but went into significant detail in discussing both bases for its possible validity. This discussion offers useful insight into these theories.
Taxpayers relied on three Supreme Court cases, Florsheim, Zellerback and Badaracco. The Tax Court looked to its own decision in Beard. Beard has a four part test one of which is that a return must be signed under penalty of perjury. The Court cited to numerous cases decided in the Second Circuit, the circuit to which the appeal of this case lies, in support of the proposition that a valid return requires a signature. In addition to the three old, if not ancient Supreme Court cases, petitioners also cited to two comparatively recent Tax Court decisions in which the IRS returned the original return to the taxpayers and the Tax Court allegedly found reasonable compliance as a basis for not finding the returns were late. In Blount, the IRS sent back a return because the taxpayer failed to attach a Form W-2. In that case the taxpayer had signed the return and did promptly return the return with the missing form. The Tax Court found the return was timely filed but nothing about the missing Form W-2 really implicates the Beard test. In White, a Summary Opinion, the IRS sent back a return missing both the spouse’s signature and a Form W-2. The taxpayers promptly signed and returned the Form 1040 with the Form W-2. The IRS conceded the validity of the joint return not forcing the Tax Court to decide the issue even in this non-binding opinion. The Tax Court stated that “it would be inappropriate for this Court to use its power to create a potentially unlimited exception to a well-established and fairly simple rule.” Finding nothing to support the application of the substantial authority rule as a basis for providing the taxpayers relief, it moved on to their arguments concerning tacit consent.
The IRS regularly uses this argument to hold that a return meets the joint return requirements where one spouse argues that their signature on the return was placed there by their spouse. The problem for the Reiflers concerning this theory is that the cases they cited were cases with two signatures. The theory behind tacit consent generally supports the position the Reiflers sought to present; however, the facts turn on consent to a signature placed on the return and not the failure to place a signature on the return. Here the IRS never argued that the return met the joint return requirements and had consistently argued it did not. In contrast to the consistency of the IRS position, petitioners had behaved neither consistently nor appropriately after receiving the original return back from the IRS. They had not signed and returned it as the IRS requested (though they disputed receipt of that request). They altered the original return before presenting it to the Court. They did not follow their stated procedures with the return. Their actions just did not support their later argument. The Court also addresses the administrative issue here for the IRS and finds that “using the tacit consent doctrine, in cases when a tax return is rejected by the Commissioner for lack of compliance with the most basic requirements would only create chaos.”
The return processing part of the IRS handles millions of returns. It needs straight forward rules to administer. It receives such a ruling from this case which is good.
Because I have seen the mischief that sending back the original return can cause, I long for a different procedure. Sometimes the IRS sends back returns, like the one in the White case, that meet the Beard test. That seems wrong. The system of processing returns is too complicated for me to arm chair quarterback. The IRS ability to process as many documents as it does is impressive but sending back original documents that purport to be returns can cause problems in unwinding the original mistake. The decision here gives the IRS a clear rule for unsigned returns and that should be an easy rule for it to follow in identifying Forms 1040 that do not make it to “return” status.
In our quick research for this post, we did not find Internal Revenue Manual sections providing instructions on what to keep, if anything, when sending back a return. I am not sure what record the IRS has of this transaction and the taxpayers attempt to comply with the return filing requirement. I would prefer to have the IRS retain the original version of the Form 1040 and send back a copy with its explanation. This leaves the IRS with evidence of what the taxpayer(s) sent and a record that something was sent. Sending back the original and having no record of the taxpayer’s submission seems to lead to problems. I also wish it would not send back returns that meet the Beard test but do not comply with the IRS desires for a return. Sending back the returns in those situations can lead to significant problems, particularly for low income taxpayers in getting the case back to the right point.