Originally published on Forbes.com.
The statute of limitations can be a beautiful thing. After three years or maybe six years, you no longer have to worry about a mistake or an aggressive position on your tax return being challenged. After ten years from an assessment, you are “olly olly oxen free”. But sometimes it really stinks. Like when the IRS has your money and won’t give it back, because of the statute of limitations. You want to avoid that happening and two recent decisions, give us some lessons on how to avoid it. The first one is pretty simple.
Last Minute
Sergio Elizalde got slightly good news from Magistrate Judge Sharon Ovington of the federal district court in Southern Ohio. (Elizalde v IRS – sorry no free link) His tax refund claim in the amount of $6,887 survived a government motion to dismiss
Plaintiff’s Complaint does not rest on fantastical or delusional factual allegations because it does not mention little green men, or the like. Cf. Ashcroft v. Iqbal , 556 U.S. 662, 696, 129 S.Ct. 1937 (Souter, J., dissenting) (Court need not credit “allegations that are sufficiently fantastic to defy reality as we know it: claims about little green men, or the plaintiff’s recent trip to Pluto, or experiences in time travel. ”). Instead, he grounds his allegations in reality. He asserts that on April 18, 2016, he sent the IRS—by certified mail—his completed tax return for the 2012 tax year. Among the information he provided in his tax return was a refund request of $6,887. In June 2016, the IRS disallowed Plaintiff’s requested tax refund on the ground it was untimely. Plaintiff’s Complaint further states, “Attached is evidence that federal tax return was indeed filed timely.”
Well, I have to say. I agree that little green men are generally unreliable and that there is no longer any point in going to Pluto, since it got demoted from planet, but time travel. Keep an open mind.
Regardless, Mr. Elizalde was arguing the timely mailed, timely filed rule. Mr. Elizalde may have read Reilly’s Seventeenth Law of Tax Planning – Don’t cut your deadlines close and us the US Mail with proof of mailing -, but skipped the first part.
Mr. Elizalde had proof that he mailed the 2012 return on April 18, 2016 (Three years from April 15, 2013 with three days tacked on for effect of weekend and holiday). The sticks in the mud at the IRS are hung up on the fact that they have the date the claim was received as being April 25, 2016.
We don’t know how the case will turn out. If you think it is a slam dunk for Mr. Elizalde, consider this conceivable scenario. If the refund is of a refund applied from the previous year and Mr. Elizalde had negligible gross income in 2012, then it was a return that was not required to be filed and the timely mailed timely filed rule does not apply. That is what happened in Langan v US a $378,000 Court of Claims petition that got knocked out for being a day late.
More important though is the practical point. Just don’t cut it so close. Mr. Elizalde had three years. Why not on April 1 (or better March 15) file with return receipt? If the return receipt is not back in a week or so, take some action to trace the envelope and refile if necessary, Some of the blame for this falls on the media which refers to April 15, as modified for weekend and holidays, as Tax Day. At any rate, Mr. Elizalde might have had a very good reason for cutting it so fine. I just can’t dream one up. Just remember, the last possible day is not the best possible day when it comes to tax filing.
Let’s move onto another deadline problem, that is more complicated.
That Account He Forgot About
Spyridon Voulgaris v IRS in the District Court for the Eastern District of Michigan is another one I can’t find a free link for. It is a more complicated story. Mr. Volugaris is suing for taking of property without due process, fraudulent preparation of a tax return by IRS, improper utilization of a technique to deprive plaintiff of his money, and unauthorized collection activity. Here is what happened.
Mr. Voulgaris while working on a Ph.D. in computer science at the University of Michigan maintained a University of Michigan Credit Union account. In 2001, he moved to Amsterdam. He filed a timely 2001 individual income tax return. That was the only US individual income tax return that he ever filed. Last year, when the complaint was filed, he was living in Greece.
It seems like he kept the credit union account open with a pretty substantial sum for somebody who had been a graduate student. There was $28,584.95 there when the credit union sent the balance to the IRS in February 2010. Mr. Voulgaris did not notice that the money had been taken until June 2012 when he started contacting the IRS to find out what had happened.
What had happened was that in 2003 he had traded securities using Scottrade. Since he was a non-resident alien who had lost about five grand trading in a US brokerage account from abroad, it didn’t occur to him them he had any sort of filing requirement. Then the IRS received a report of gross proceeds of $76,845.59.
Of course, all the IRS knew was that there were gross receipts. When in doubt, tax it. If there is basis, it’s up to the taxpayer to figure it out. On September 2, 2008 a statutory notice of deficiency was issued. There being no response the deficiency was assessed and with continued radio silence from Europe an intent to levy collection due process notice went out on November 16, 2009. On January 28, 2010 a notice of levy goes to the credit union asking for $28,780.20, which you will note above cleaned out the account.
Too Late
It was over two years (June 2012) before Mr. Voulgaris noticed that his Michigan credit union account was no more. He requested a refund from IRS sending them a Schedule D that showed he did not have any gains, which was received on February 10, 2013. IRS responded that it could not close the account without a signed 1040. IRS records that as having been received on August 19, 2015. On September 25, 2015 IRS mailed a letter of disallowance based on the claim being untimely.
Those dates are the ones that the court deemed relevant. In the complaint there is a bit more drama as the IRS loses things that Mr. Voulgaris has to resend and the like. You and I know that this is all pretty mechanical and impersonal, but after going through the painful process and then being told that he was too late, I could see Mr. Voulgaris being infuriated.
Tough
Plaintiff’s wrongful collection claim is barred by the statute of limitations. Under section 7433 “may be brought only within 2 years after the date the right of action accrues.” 26 U.S.C. § 7433(d)(3). A taxpayer’s Section 7433 cause of action accrues “when the taxpayer has had a reasonable opportunity to discover all the essential elements of the possible cause of action.” 26 C.F.R. § 301.7433-1(g)(2); Banks v. United States, 2009 U.S. Dist. LEXIS 30225, *30 (N.D. Ohio Mar. 27, 2009); Tenpenny v. United States, 490 F. Supp. 2d 852, 859 (N.D. Ohio 2007).
Here, as a February 2010, plaintiff’s bank statement reflected that the funds were removed from his account by IRS levy. At that time, plaintiff had a reasonable opportunity to discover that the levy had occurred as early as March of 2010 when his statement became available. As such, he was required to file this lawsuit by March of 2012. The complaint was filed on September 25, 2017—far outside of the statute of limitations. (Emphasis added)
So the IRS took Mr. Voulgaris’s money and he didn’t notice it for over two years. When he does notice and he contacts IRS, does IRS say “Too bad. You had two years to ask for it back. You are out of luck.”? No. IRS tortures and tantalizes him for three years and then tells him he was too late and now the court tells him that he was too late when he started.
I really think he got a raw deal, but when I reached out to some lawyers they were like “So it goes”.
The Lesson
The lesson on the Voulgaris case is probably to pay attention to your bank statements and to not leave bank accounts under US jurisdiction when you leave the country. Also don’t think you don’t have to file just because you lost money.
Coming Up
I’m closing in on finishing my final tax season, so I hope I will be able to engage more with my second career. Between having my partner make me pay attention to the day job and some stories that took a lot of time, I have been neglecting court decisions. And as you can see from the above those judges really act up when I am not keeping an eye on them. I’ve got a few more interesting decisions to share with you and hopefully won’t be diverted by another Kent Hovind development or something like the Pussy Church.