Saved by Beard—Taxpayer’s Return Was Timely, by ROBERT S. HORWITZ
I don’t mean the Seinfeld episode “The Beard” or the San Francisco Giants’ former closer, Brian “The Beard” Wilson. I mean the Beard test for determining whether information provided the IRS constitutes a tax return. Fowler v. Commissioner, 155 T.C. No. 7 (Sept. 9, 2020), involved the question of whether a Form 1040 electronically filed by the petitioner was a return and whether it was properly filed. The facts in the case are simple:
Petitioner had been a victim of identity theft in 2013 and the IRS had sent him a Identity Protection (IP) PIN prior to October 15, 2014, the date his CPA transmitted the 2013 return. Petitioner authorized his CPA to e-file the return and the CPA e-signed the return with his Practitioner PIN and electronically filed it with the IRS. The CPA received a Submission ID from the IRS, acknowledging that the return had been received. He then received notice that the return was rejected because it did not have an IP PIN. A 2013 return with petitioner’s IP PIN was not transmitted to the IRS until April 30, 2015, and the return was processed by the IRS. But for the inclusion of the IP PIN the April 30, 2015, return was identical to the October 15, 2014, return.
After an audit, the IRS issued a Statutory Notice of Deficiency (SNOD) to the taxpayer on April 8, 2018. He filed a petition with the Tax Court, claiming that the SNOD was barred by the three-year statute of limitations on assessment. The petitioner and the IRS filed cross motions for summary adjudication on the issue of whether the SNOD was time barred. The Tax Court granted petitioner’s motion.
Whether the SNOD was time barred turned on two questions: first, was the October 15, 2014 submission a required return and second, was it properly filed. The Tax Court noted that Code defines return as “the return required to be filed by the taxpayer” and neither the Code nor the regulations expand on this definition. Thus, in Beard v. Commissioner, 82 T.C. 766 (1984), aff’d 793 F.2d 129 (6th Cir. 1986), the Tax Court established a three-part test to determine whether something is a return:
- Does the document purport to be a return and does it provide sufficient information to calculate the tax liability.
- Did the taxpayer make an honest and reasonable effort to satisfy the requirements of the tax laws.
- Did the taxpayer sign the return under penalties of perjury.
The Tax Court found it was clear the October 15, 2014, submission met the first prong. To meet the second prong, the return must appear reasonable on its face; thus, a fraudulent return can satisfy this requirement, although a return having zeros on every line would not. The earlier submission was identical but for the IP PIN accepted by the IRS and thus it met the second prong.
The third prong, whether the return was validly signed, was the bone of contention. The IRS argued that to be a valid signature a return must include the IP PIN. The Tax Court noted that there was nothing in the regulations requiring an IP PIN. Treasury. Reg. sec. 1.6695-1(b)(2) requires signing return preparers to electronically sign returns in the manner provided in forms and instructions. There was no IRS guidance characterizing an IP PIN as a signature. The instructions to the 2013 Form 1040 just state that the return must be signed with either a Self-Select PIN or a Practitioner PIN. Petitioner’s CPA used the Practitioner PIN. The Tax Court stated: “Just as taxpayers must comply with instructions referenced on IRS forms … the IRS cannot disavow the 2013 1040 instructions to accommodate its litigation stance.” The taxpayer justifiably relied on IRS instructions and the October 15, 2014 submission was signed as required.
The Tax Court rejected the IRS’ argument that Internal Revenue Manual 10.5.3.2.15(3) required an IP PIN for a return to be valid. That IRM provision states that an electronic return that is filed with a missing IP PIN will be rejected. This, however, did not mean that petitioner’s submission struck out with the third Beard prong, since a return can be rejected for a number of reasons that do not affect its validity. Thus, petitioner’s October 15, 2014, submission was a valid return.
The Tax Court then addressed the second issue, whether the return was properly filed. The test is whether a taxpayer’s “mode of filing” complies with the IRS’s prescribed filing requirements. A return is filed when it is delivered to the correct IRS office even if it is not accepted by the IRS or not processed. Here the October 15, 2014 return was properly e-filed, even though it was rejected. As a result, the SNOD was barred by the statute of limitations.
Associate Justice Oliver Wendell Holmes, Jr., wrote in Rock Island C.R.R. v. United States, 254 U.S. 141, 143 (1920) that “Men must turn square corners when they deal with the Government.” It is good to see the IRS being required to cut a square corner when dealing with taxpayers. Contact
Robert S. Horwitz at email@example.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 http://www.taxlitigator.com.