Tax trap for non-filers.

Practitioners generally believe that a taxpayer has three years to apply for a refund of taxes, which is usually the case. However, the recent Tax Court decision in Allen, 99 TC No. 23 (1992), demonstrates that conventional wisdom may at times prove unreliable. In Allen, the taxpayer extended the filing date of his 1987 Federal income tax return to Aug. 15, 1988, but he did not file his 1987 return until Oct. 2, 1990 - more than two years from the extended due date of the return (Aug. 15, 1990), but less than three years from the extended due date (Aug. 15, 1991).

In the meantime, the Service had sufficient Form W-2 and Form 1099 information to compile a statutory notice of deficiency for 198 7. The notice of deficiency was issued on July 24, 1990. On Oct. 22, 1990, Allen filed a timely petition for the redetermination of the deficiency with the Tax Court.

The return filed by the taxpayer on Oct. 2, 1990 showed a refund due of $17,024. Although the tax return was filed within three years of the extended due date, the claim for refund was disallowed by the IRS. The Tax Court upheld this disallowance.

Under Sec. 6512(b)(1), the Tax Court has jurisdiction to determine the refund of an overpayment, provided that the statute of limitations has not expired. When a claim has not previously been filed, Sec. 6512(b)(3)(b) treats the issuance date of a deficiency notice as the date of the refund claim. Thus, if a claim would be timely as of the notice of deficiency date, the Tax Court will order a refund. Whether a claim is timely is determined by Sec. 6511, which allows a refund to be made within three years of the return filing date or, if no return has been filed, within two years of the payment date. The Tax Court ruled that, since a return had not been filed by the taxpayer as of the date of the deemed refund claim (that is, the date of the July 24, 1990 deficiency notice), the three-year period did not apply, and the refund under Sec. 6511 was limited to payments made within two years of the date of the claim. Since no payments had been made during this period, no refund was allowed.

The planning point made clear by Allen is that a nonfiling taxpayer that receives a deficiency notice more than two years from the date of payment but less than three years from the due date of the return should first evaluate whether it will be entitled to a refund. If a refund is expected, the taxpayer should pay the full amount of the deficiency and then file a claim for refund, which may be made on the original Form 1040. If the taxpayer petitions the Tax Court, the refund will be disallowed.