You Be the Tax Judge: The IRS Received the Tax Return. But Was It Filed?

The IRS generally has three years to assess additional tax after a return is filed. But what exactly does it mean to file a return?

That’s the question at the center of this week’s You Be the Tax Judge.

What happened?

Seaview Trading, LLC, a California-based company treated as a partnership for federal income tax purposes, claimed a $35.5 million loss on its 2001 federal income tax return. Seaview maintained that it had mailed its return to the IRS in July 2002, in an envelope that also contained another entity’s return. But Seaview couldn’t establish that the IRS had received its return.

In July 2005, an IRS revenue agent contacted Seaview about the missing return and asked the partnership to provide a copy of the return and proof that it had been mailed. In September 2005, Seaview’s accountant faxed a copy of the return to the revenue agent in South Dakota and included a certified mail receipt. The IRS subsequently began examining Seaview’s 2001 tax year.

In July 2007, Seaview’s attorney sent another copy of the return to an IRS attorney in Minnesota after a conversation with that attorney.

Then, in October 2010, the IRS issued a notice of final partnership administrative adjustment disallowing the partnership’s $35.5 million loss.

Seaview challenged the adjustment in Tax Court, arguing that the IRS had missed its deadline.

The details of the dispute

Under the applicable rules, the IRS generally had three years from the filing of a partnership return to make certain adjustments. If no return is filed, however, the IRS could assess tax attributable to partnership items at any time.

Seaview argued that it had filed its return no later than September 2005, when its accountant faxed the requested copy to the revenue agent. Alternatively, it argued that the July 2007 mailing to the IRS attorney qualified as filing. Either way, more than three years had passed before the IRS received the return and issued its October 2010 notice.

The IRS disagreed. According to the government, sending a copy of a return to an IRS employee wasn’t necessarily the same as filing it. The rules required Seaview to submit its return to a designated IRS Service Center in Ogden, Utah. Neither the revenue agent nor the IRS attorney forwarded the copies they received to that Service Center. Seaview also did not send another copy there.

As a result, the IRS maintained that the return had never been properly filed—and the three-year limitations period had never started.

You Be the Tax Judge

The IRS requested a copy of the return, and Seaview provided it. The agency then conducted an examination and ultimately disallowed a substantial loss. However, the return never reached the IRS location designated for filing.

What do you think? You be the tax judge.