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A Return by Any Other Name by ROBERT S. HORWITZ

You’d think deciding whether something is a federal tax return would be easy: if it’s on a return form put out by the IRS, containing information sufficient to determine the taxpayer’s tax liability and signed under penalty of perjury by the taxpayer it’s a valid tax return.[1]  If only it were that simple.  Whether a specific document qualifies as a tax return is a question that has sometimes perplexed taxpayers, the IRS, and the Courts.  To address the question, the Tax Court in Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d per curiam, 793 F.2d 139 (6th Cir. 1986), came up with a four-part test that has been adopted by many of the Courts of Appeals:

First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.

Two recent appeals court decisions, Quezada v. IRS, __ F.3d __, 982 F.3d 931 (December 11, 2020), and Coffey v. Commissioner, 982 F.3d 1127 (8th Cir. December 15, 2020), address the question of whether the taxpayer had filed a valid return and reached potentially contradictory conclusions.

First Quezada.  Mr. Quezada was a stone mason who performed masonry services for general contractors.  He hired independent contractors to do the work.  He issued Forms 1099 to each independent contractor, reporting the total compensation he paid to them.  Most of the Forms 1099 did not have tax identification numbers for the independent contractors.  Under IRC sec. 3406(a), Mr. Quezada was required to withhold from payments to these independent contractors a tax, calculated at a flat rate, and pay it over to the IRS.  When required by regulation, any person liable for any tax, is to “make a return or statement according to the forms and regulations prescribed by the Secretary… [and] include therein such information required by such forms or regulations.”  IRC sec. 6011(a).  A person subject to backup withholding is supposed to pay the amount owed and file a Form 945.  Treas. Reg. sec. 31.6011(a)-(4)(b).  For the years 2005 through 2008 Mr. Quezada didn’t file Forms 945 or pay backup withholding.  In 2014, the IRS assessed over $1.2 million in backup withholding, interest and penalties against him.

Mr. Quezada filed in bankruptcy and sought a determination that the assessments were time-barred.  He lost in bankruptcy court and district court but prevailed on appeal to the Fifth Circuit on his argument that his Forms 1099 and Form 1040, when combined, contained sufficient information to calculate his backup withholding liability and the filing of these forms started the statute of limitations for assessing backup withholding. 

The IRS argued that Treasury Regulations require the filing of Form 945 to report backup withholding and since Mr. Quezada did not file the form, he did not file the return and the statute of limitations never began to run.  The IRS relied on Commissioner v. Lane-Wells, 321 U.S. 217 (1944), where the Court held that a corporate tax return was not a personal holding company return and thus did not start the running of the statute of limitations.  Rejecting the IRS’s argument, the Fifth Circuit seized on language in Lane-Wells that the form filed by the taxpayer “did not show the facts on which liability could be predicated” and noted that some of the Supreme Court’s statements indicated that “the wrong form can be ‘the return’ so long as the form shows the facts on which liability could be predicated.”  Here, the Forms 1099 and 1040, taken together, contained sufficient data on which liability could be predicated, with the Forms 1099 showing the names and amount paid each independent contractor.

According to the Fifth Circuit “the better reading of Lane-Wells is that the taxpayer is not required to file the precise return prescribed by Treasury Regulations in order to start the limitations clock.  Instead, ‘the return’ is filed, and the limitations clock began to tick, when the taxpayer files a return that contains data sufficient (1) to show that the taxpayer is liable for the tax at issue and (2) to calculate the extent of that liability.”  Since Mr. Quezada’s returns contained sufficient data to show the liability for backup withholding, the Forms 1040 and 1099 he filed constituted the return.  Since the assessments were made more than three years after these forms were filed, they were time-barred.


  (1) The Court failed to consider the effect of Mayo Foundation v. United States, 562 U.S. 44 (2011), which held that Chevron deference applies to Treasury Regulations.  Maybe I’m wrong, but under Chevron, since the backup withholding statute states that the “Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purpose of this section” and the regulation was not contrary to existing Supreme Court precedent, under Chevron it should have been accorded deference.

(2) The IRS based its assessments entirely on the information contained in the Forms 1099s and 1040s.  The 1099s revealed that many of the independent contractors did not provide Mr. Quezada with their SSNs, which the IRS should have realized when it processed the 1099s, which were apparently filed timely.  There does not seem to be any reason why the IRS took several years after the filing of the 1099s for 2008 to wake up to this fact and make the assessments against him. 

(3) Assume a taxpayer files a Form 8938 that lists foreign bank accounts, but not FBARs.  Would the filing of the Form 8938 be a defense against the FBAR penalty? Or the filing of an FBAR be a defense against the penalty for failing to file Form 8938? 

Which takes us to Coffey.  This is a case where the taxpayers claimed to be residents of the U.S. Virgin Islands.  They filed income tax returns for 2003 and 2004 with the U.S.V.I. but not with the IRS.  The IRS determined the taxpayers weren’t bona fide U.S.V.I. residents and issued a notice of deficiency.  The taxpayers petitioned the Tax Court.

Bona fide U.S.V.I. residents file returns with the U.S.V.I. And pay a reduced tax rate on U.S.V.I.-related income.  A person who is not a bona fide U.S.V.I. resident who has U.S.V.I. source income files returns with both the U.S.V.I. and the IRS. 

The U.S.V.I. sent the IRS the first two pages of the taxpayers’ U.S.V.I. returns shortly after they were filed.  The IRS processed the returns and then remitted the taxpayers’ prepayments to the U.S.V.I., which refunded overpayments to the taxpayers.  The IRS issued the notice of deficiency to the taxpayers in 2009, more than three years after it received the taxpayers’ returns from the U.S.V.I.  In Tax Court, the taxpayers moved for summary judgment on the ground that the deficiency notices were barred by the statute of limitations.  The Tax Court agreed, finding that the taxpayers’ returns were filed with the IRS more than three years before the notices were issued.  The Eighth Circuit reversed.

IRC section 932(a)(2) requires persons who are nonresidents of the U.S.V.I. with U.S.V.I. related income to file returns with “both the United States and the Virgin Islands.”  The Eighth Circuit treated the taxpayers as nonresidents for purposes of the appeal and noted that statutes of limitation are strictly construed in favor of the Government.

The taxpayers claimed (a) that the U.S.V.I. sending their tax documents to the IRS was filing with the United States and (b) that filing their returns with the U.S.V.I.  met their nonresident filing requirement.  The Tax Court had agreed with the first argument, even though the taxpayers did not know or explicitly approve of the U.S.V.I. sending their returns to the IRS.

According to the Eighth Circuit, the taxpayers were required to show “meticulous compliance” with all filing requirements contained in the IRC and Treasury Regulations.  (This of course was something that Mr. Quezada had failed to do.)  “Returns are ‘filed’ if ‘delivered, in the appropriate form, to the specific individual or individuals identified in the Code or Regulations.”  Furthermore, “the three year statute of limitations begins only after the taxpayer’s ‘returns were filed.’  [citation omitted]. The IRS’s actual knowledge is not a filing ….  Without a filing, the statute of limitations in section 6501(a) does not begin when the IRS received the information.”

The Eighth Circuit held that the U.S.V.I.’s sending the first two pages of the return was not a “filing.”  It was undisputed that the Coffeys did not intend to file returns with the IRS, but only with the U.S.V.I.  The U.S.V.I. did not file any returns with the IRS, the Coffeys did not authorize it to file returns and did not even know that the U.S.V.I. sent the tax documents to the IRS.  Thus, the IRS’s processing of the documents did not “create a filing.”

That the Coffeys’ returns were honest and genuine does not affect whether they were filed with the IRS.  That the IRS receives and processes returns from the U.S.V.I. does not satisfy the filing requirement, since the U.S.V.I. is a separate taxing entity and the IRC doesn’t “create an exception for a taxpayer’s mistaken position about residency.”  It was also irrelevant that the returns filed with the U.S.V.I. are identical to federal tax returns since the returns were not filed with the IRS.

The Eighth Circuit ended its analysis that “without a filing, the documents are not an honest and genuine attempt to satisfy the tax laws and are not filed returns.  The Coffeys did not file returns with the IRS, but only returns with the” U.S.V.I.”  Thus, the statute of limitations on assessment for the years in issue had never started to run.

As noted in the Tax Court’s opinion, the IRS transcripts of account for the Coffeys had entries for a return received date and a return processed date for the returns the U.S.V.I. transmitted to the IRS.  If the IRS’s internal records treated the tax documents as returns that were received and processed in the same manner as returns a taxpayer “files,” why weren’t the Coffeys’ returns “filed” with the IRS?  The Tax Court’s decision focused on whether the returns received from the U.S.V.I. met the Beard test and determined that they did.  It seemed apparent to the Tax Court that the documents were filed with the IRS.   One thing the Tax Court found troubling was that the IRS began audits of the Coffeys within two years after it received the returns but dawdled, did not seek statute extensions, and waited several years before issuing the notices of deficiency.

So what do we make of this?  If the Fifth Circuit required “meticulous compliance” with the requirements of the Code and Regulations, it would have affirmed and not reversed the bankruptcy and district court.  But would the Eighth Circuit have affirmed the Tax Court if it applied the Fifth Circuit’s reasoning?  Not necessarily.  First, unlike Mr. Quezada, the Coffeys did not file their returns with the IRS; they were sent to the IRS by the U.S.V.I.  Second, while there was no claim that the Coffeys’ returns understated income or overstated deductions and credits, the tax documents sent to the IRS did not contain all the information needed to determine their liability because the Coffeys’ claimed they were bona fide residents of the U.S.V.I. Their returns thus did not have all the information needed to determine their liability.   But while Mr. Quezada’s Forms 1099 and 1040 contained sufficient information to determine his liability, did he intend for them to meet his backup withholding filing obligation? 

Contact Robert S. Horwitz at horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman Salkin Toscher Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at https://www.taxlitigator.com.

[1]We won’t even discuss the potential problems with “tax returns” electronically filed by a paid return preparer, where the taxpayer does not sign the return but instead signs Form 8879, IRS e-file Signature Authorization, and the return preparer’s PIN is treated as the taxpayer’s signature.  That will be reserved for another day or another blog.

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