When (and where) is it filed?

The Fourth Circuit recently upheld a Tax Court decision that a deficiency notice beat the three-year statute of limitations only because the taxpayer had hand-delivered his returns to the wrong office.

The IRS is generally required by IRC [section] 6501(a) to assess income tax deficiencies no later than three years after the filing of an income tax return. In 1997, when the facts at issue in this case occurred, section 6091(b)(1)(A) required individual taxpayers to file their returns with the director of the district office in which their legal residence or principal place of business was located. In the case of tax returns delivered by hand, Treas. Reg. [section] 1.60912(d)(1) required them to be filed with the district director or any person who is the administrative supervisor of an area, zone or office which is a permanent post of duty within that IRS district. (These provisions have since been amended to require filing within the taxpayer's IRS district to a designated service center or a responsible person at a local IRS office serving the taxpayer's legal residence or principal place of business. Hand delivery must be to a person with responsibility to receive hand-delivered returns at the same local office.) The term "filed" was, and is, not defined in the Code or regulations, but the courts have considered returns filed only when they have been delivered in the proper form to an individual and location specified in the Code or regulations.

Excavation business owner and tax protester Fred W. Allnutt Sr. of Ellicott City, Md., waged a decades-long legal battle with the IRS that included criminal charges against him of tax evasion and conspiracy, of which he was acquitted in a jury trial in 1997. He then submitted returns he had refused to file for 15 previous years--1981 through 1995. On the advice of his attorney, Allnutt signed the returns and hand-delivered them, along with a transmittal letter, on Feb. 21, 1997, to what he later acknowledged was the wrong place: the Baltimore District Counsel Office of the IRS. Less than a half-hour later, as what he thought was just a courtesy, he took photocopies of those returns, which he signed over his photocopied signature, to the Baltimore District Office of the IRS, where the original returns should have been hand-delivered. He addressed the envelope containing the copies to the district director and asked directions to his office, but wound up instead giving it to an unidentified person without receiving any receipt or record indicating the time and date. These copies ended up at the Philadelphia Service Center of the IRS with a postmark of May 9, 1997, while the original returns were received at the Special Procedures Office of the District Director on March 10, 1997. With neither set of returns did he pay the full amount of tax the IRS would later contend he owed: nearly $2 million, including penalties.

More than three years after Allnutt dropped off the returns, the IRS mailed him a notice of deficiency. However, the date of the notice, March 6, 2000, was four days before the third anniversary of Allnutt's original returns being stamped as received and well before that of the copies reaching Philadelphia, where they had been processed as his returns. The notice assessed taxes for 1987 through 1990 and 1992 through 1995.

Allnutt petitioned the Tax Court for relief, stating the assessment was not timely. The Tax Court held the assessment was timely since Allnutt never intended to file the photocopied returns, and his originals weren't properly filed until they reached the correct office. Allnutt appealed the decision to the Fourth Circuit.

The Fourth Circuit chose not to consider which of the two sets of returns Allnutt intended to file. It instead found that Allnutt had not "meticulously complied" with the Code and regulations, since he did not deliver the returns to the district director, that person's assistant, the director's office or even to the Taxpayer Services walk-in area in the building. The IRS could have handled Allnutt's returns more efficiently, but statutes of limitations must be strictly construed in the government's favor, the Fourth Circuit said.

This case illustrates how proper observance of the statute of limitations requires strict compliance with procedural rules for filing returns.

* Allnutt v. Commissioner, 101 AFTR2d 2008-1836

By Charles J. Reichert, CPA, professor of accounting, University of Wisconsin--Superior.