An issue that is often litigated is whether and when a return is deemed filed for purposes of starting the SOL on assessment. In today’s post, I will discuss Quezada v US and the IRS’s decision to publish an Action on Decision disagreeing with the Fifth Circuit.
We have not discussed AOD’s though we have discussed the Quezada case a few times. The most recent is here, where Keith reviewed how the Fifth Circuit held that the Form 1040 filed by the Quezadas and the Forms 1099 issued by his business to its workers that omitted the workers’ tax identification numbers started the running of the statute of limitations for backup withholding. As readers may know, the Code requires payers to backup withhold at a rate of 24 percent on reportable payments for a payee that refuses or neglects to provide a correct TIN
An AOD is the Service’s way of notifying the public and its employees about the Office of Chief Counsel’s litigating position. When the IRS loses in a circuit court case, as in Quezada, or a precedential Tax Court opinion, if Counsel disagrees with the opinion, an AOD discusses the reasons why. The AOD lets the public and practitioners know that taking a position consistent with the opinion will lead to the IRS challenging the position if the matter is appealable to a different circuit.
Back to Quezada.
As Keith discussed, the Fifth Circuit based its holding on the view that the combination of Quezada’s 1040 and the business’ deficient 1099’s provided the IRS with sufficient information to determine potential backup withholding liability:
The court decides that the Forms 1040 and 1099 did provide the IRS with enough information to create an informal Form 945. The forms filed contained enough data to show he had a backup withholding liability. The Forms 1099 showed the amount paid and the person paid thus allowing the IRS to calculate the amount of backup withholding that Quezada should have made. Case over.
The AOD that Counsel issued this past February flatly disagrees with the Fifth Circuit’s discussion of the IRS’s ability to determine backup withholding liability based just on the 1040 and Form 1099:
The omission of a payee’s TIN on a Form 1099-MISC does not conclusively establish the payor’s liability for backup withholding. Instead, backup withholding liability arises from the failure to obtain a payee’s TIN, which is not evident on the face of the Form 1099-MISC. I.R.C. § 3406(a)(1)(A); Treas. Reg. § 31.3406(a)-1(b)(1)(i).
As the AOD notes, if upon making payments to the workers the taxpayer had obtained the workers’ TIN but mistakenly omitted the number, there would be no backup withholding liability. In addition, as the AOD notes, the Service could not determine the extent of the liability just by the taxpayer’s filed 1040 and 1099’s.
As Keith discusses in his post, the Fifth Circuit and IRS disagreed about how to apply the 1944 Supreme Court Lane-Wells opinion. The AOD does not go so far as arguing for a per se rule that would prevent the SOL from running when there is no return filed for the tax liability at issue, but it takes the view that Form 945 is needed for the SOL to start running on backup withholding liability:
Under Lane-Wells, it is inappropriate to treat a payor’s Form 1099-MISC information returns reporting payments to payees, in combination with the payor’s individual income tax return, as “the return” that triggers the running of the period of limitations for assessing backup withholding liability. This is because: (1) the Forms 1040 and 1099-MISC are separate returns that neither reference nor rely upon each other for either return to be complete; (2) neither the Form 1040 nor the Form 1099-MISC requires reporting backup withholding liability; and (3) the Service has prescribed a separate Form 945 for a payor to report backup withholding liability and that is the form to which it looks in determining whether such liability exists.
The Inspector General has reported taxpayers avoiding payment of billions of dollars in backup withholding. TIGTA noted that IRS was developing a cross-functional working group to analyze current backup withholding policies, so the compliance issue is on IRS’s radar.
Of course the Inspector General’s disclosure two weeks ago revealing that IRS destroyed millions of filed information returns does not atmospherically contribute to liberally allowing IRS to chase taxpayers who themselves make mistakes relating to returns akin to information returns (for that bombshell, see A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing at page 2).
This AOD tells us that IRS is likely to press the issue. Stay tuned.