Originally Published on forbes.com on July 31st, 2011
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As I mentioned in a previous post, I have accumulated quite a few items that I can’t quite work into full length posts, but hate to let go. This blog is like the baseball part of the nightly news. They fit everything interesting that happened in the 50 or so hours of major-league baseball that day into a couple of minutes of footage. I have a similar goal with the body of original source federal tax material. Sometimes, I get distracted from things I think are a little interesting by things that are really interesting – like an anchorwoman deducting her underwear or a guy starting a not-for-profit to distribute his own sperm. So here are a couple of things I found a little interesting better late than never. CCA stands for Chief Counsel Advice. We get to read them thanks to the Freedom of Information Act. These three are a little stale by my standards, but I don’t think they have gotten a lot of attention, so they are still worth sharing.
If the IRS says you owe extra taxes, they will send you something called a statutory notice of deficiency. You then have 90 days to file a petition with the tax court. You don’t need to pay the tax and there will be no collection action while the case is pending. For those not strapped for cash, who would like a more leisured approach, you can just pay the tax. Then you have two years to sue for a refund. (Actually this is a fairly complicated decision, which is why tax litigators make more than CPA’s). This Chief Counsel Advice is about whether there is wiggle room on the two years, if you are trying to settle with the IRS. Apparently there is not:
There is no “don’t have to worry” period for the taxpayer when Appeals is still working the case on the eve of the 2-year statute expiration date. Taxpayers can protect themselves only by filing suit or executing an extension. In this type of situation when the Service is considering allowing a portion of the claim, the Service should consider extending the period for filing suit on a Form 907 as authorized in section 6532(a)(2).
Sometimes I encounter great paradoxes in IRS material:
I apologize for the delay in answering your inquiry. Obviously, litigation matters have taken precedence over general questions given the impending shutdown. Per my telephone message, if a taxpayer is on extension and timely files an amendment within the extension period, that later return supersedes the earlier return and becomes the taxpayer’s original return. Please call if you have any further questions.
I apologize for the delay in answering your inquiry. Obviously, litigation matters have taken precedence over general questions given the impending shutdown. Per my telephone message, if a taxpayer is on extension and timely files an amendment within the extension period, that later return supersedes the earlier return and becomes the taxpayer’s original return. Please call if you have any further questions.
So if you file an amended return before the extended due date of your original return, it is not an amended return. It is the original return. When exactly does this transformation occur ? We’ll probably never know because as we can also read from the CCA, they are busy, busy, busy at the Office of Chief Counsel.
There is a three year statute of limitations on assessing additional tax from a valid return. If there is an understatement of gross income of more than 25%, though, a six year statute applies. The question addressed in this CCA is whether amending a return to show additional gross income will cut off the six year statute. The answer is no:
The filing of an amended return showing additional income will not operate to preclude the application of section 6501(e). The original return governs for purposes of determining whether the taxpayer has omitted from gross income an amount that is over 25% of the amount stated on the return.
I have to commend the Chief Counsel’s office for discerning the possibility of a bad motivation on the part of the IRS personnel asking the question:
We note that the Service should act within the three-year period of section 6501(a) whenever possible. To the extent that additional tax may be assessed and/or notices of deficiencies issued in your case within the three-year period, the Service should take that action even if it is determined that section 6501(e) applies.
So the answer is: Yes, you have a six year statute. No, you should not put this case on the shelf for two years, because there is plenty of time. The exact scope of the six year statute rule has been a raging controversy in the last few months with courts ruling differently on whether a basis overstatement constitutes a gross income understatement. Here is the last post I wrote about it. Those cases are the result of the abusive partnership arrangements popular until around the turn of the Millennium. One of the more dramatic was the one entered into by EMC founder Richard Eagan. I wouldn’t be surprised if this CCA was in response to the planners of one of those transactions trying to shorten the statute.