Employer's Failure to File Form 945 Prevents Statue of Limitations from Applying

(Parker Tax Publishing October 2019)

A district court affirmed a bankruptcy court and held that back-up withholding taxes assessed by the IRS on a business owner, who failed to file Forms 945 and failed to provide the required taxpayer identification numbers of independent contractors he hired in his business, were not dischargeable in bankruptcy. The court found that, while the taxpayer had filed Forms 1040 and 1099 for the years at issue, his failure to file Forms 945 prevented the statute of limitations from applying to the tax assessments. In re Quezada, 2019 PTC 386 (W.D. Tex. 2019).

Background

James Quezada, a bricklayer and the owner of Quezada Masonry, builds masonry projects for general contractors. Quezada typically supplies the materials and hires contract laborers and subcontractors to perform the labor. From 2005-2008, Quezada filed tax returns, which included Forms 1099-Misc., in which he reported payments made to subcontractors. Quezada claimed deductions for these payments on his Form 1040 for each of these years. The Forms 1099 filed by Quezada for years 2005-2008 showed no withholdings on payments made to his subcontractors, and Quezada did not file Forms 945, Annual Returns of Withheld Federal Income Tax, for tax years 2005 through 2008. In addition, Quezada did not obtain a social security number (SSN) or taxpayer identification number (TIN) from all of his subcontractors.

In September 2006, the IRS sent a notice to Quezada that his 2005 Form 1099 had missing or incorrect TINs (which includes SSNs). The notice also informed Quezada that if he had missing or incorrect TINs, he had to start backup withholding. The IRS sent the same notice out in 2007 and twice in 2009 about Quezada's later-filed Forms 1099. Quezada did not provide the missing or incorrect TINs for the tax years 2005 through 2008.

In February 2014, the IRS assessed Quezada's backup-withholding-tax liability for 2005-2008 totaling $1,269,561, including penalties and interest, pursuant to Code Sec. 3406. Quezada was sent a Notice of Determination in March 2015, notifying him of the total backup-withholding-tax liability assessed. In April of 2016, Quezada and his wife filed for bankruptcy under Chapter 11 of the Bankruptcy Code. In November, Quezada filed a complaint challenging the assessment of the backup withholding tax and his case went before a bankruptcy court. According to Quezada, his filing of Forms 1099 and 1040 began the three-year statute of limitations under Code Sec. 6501, which prohibits tax assessments made after the statute of limitations has closed. Thus, he argued, he was not liable for the backup-withholding-tax liability.

Code Sec. 6501(a)(3) imposes a three-year tax-assessment-limitation period beginning on the date a taxpayer files a "return required to be filed." Code Sec. 6011 requires a taxpayer to file a return in accordance with the forms and regulations prescribed by the IRS. Under Reg. Sec. 31.6011(a)-4, a person required to withhold backup withholding tax must file a Form 945. In addition, Code Sec. 3406 requires a payor to conduct backup withholding when a payee fails to provide the payor with a TIN.

Bankruptcy Court's Decision

In Quezada v. IRS, 2018 PTC 297 (Bankr. W.D. Tex. 2018), a bankruptcy court concluded that the taxes assessed on Quezada by the IRS were valid, allowed, and non-dischargeable. The court concluded that Quezada failed to prove that he had the required TINs when he filed Forms 1040 and 1099 for tax years 2005 through 2008. According to the bankruptcy court, because Quezada had a duty to withhold, Quezada was required to file Forms 945 for tax years 2005 through 2008, rendering his tax filings for those years incomplete. The bankruptcy court further determined that Quezada's statute of limitations argument was controlled by the Supreme Court's reasoning in Comm'r of Internal Revenue v. Lane-Wells Co., 321 U.S. 219 (1944), because Quezada, like the taxpayer in Lane-Wells, was required to file two separate returns and failed to file one of them. In that decision, the Supreme Court noted that Congress has granted the IRS discretion to prescribe by regulation forms of returns, the purpose of which is not just to get tax information, but "also to get it with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished."

Quezada appealed.

District Court's Decision

On appeal, the sole issue before the district court was whether the filing of Forms 1099 and 1040 by Quezada began the three-year statute of limitations under Code Sec. 6501. Quezada argued that his filings of Forms 1099 and 1040 were "returns" sufficient to trigger the three-year statute of limitations, and that his failure to file Forms 945, which Quezada asserted were not required, had no bearing on the start of the statute-of-limitations period.

The government asserted that Quezada was required and failed to conduct backup withholding from his contract laborers, and therefore was also required and failed to report this backup withholding on Forms 945 for tax years 2005 through 2008. The government further contended that because no Forms 945 were filed, the three-year statute of limitations imposed by Code Sec. 6501 was never triggered and the bankruptcy court properly determined that the backup withholding liability assessed against Quezada was not barred by Code Sec. 6501.

In response, Quezada argued that the question was not whether he should have begun backup withholding or whether Forms 1099 and 1040 are substitute returns for Forms 945, but what form or forms were necessary to start the running of the statute of limitations under Code Sec. 6501. According to Quezada, the exception under Code Sec. 6501(c)(3) which provides that "[i]n the case of failure to file a return, the tax may be assessed. . . at any time" does not mean that the failure to file any IRS form nullifies the statute of limitations. The government contended that Form 945, which Quezada asserted would have added nothing to the tax calculation, was necessary to begin the running of the three-year statute of limitations.

The district court affirmed the bankruptcy court's holding. The court found that Quezada failed to file any Forms 945 along with, or anytime after, he filed Forms 1040 and 1099 for tax years 2005 through 2008. Thus, no assessment limitations was triggered with respect to Quezada's backup-withholding-tax liability. With respect to Quezada's argument that the bankruptcy court erred in relying on Lane-Wells because that case involved a two-level tax issue for limitations purposes whereas Quezada's case involves only one, the court rejected the assertion that the consequences of procuring an incorrect TIN from a payee or collecting incorrect backup withholding were irrelevant to the calculation of Quezada's deductions for business income and expenses as provided in his Forms 1040. Quezada claimed deductions for subcontractor expenses on his income taxes, the court noted, thus requiring him to file Schedule C and Forms 1040 for the tax years 2005 through 2008. By filing his Forms 1040 and 1099, the court said, Quezada met the first level of his tax liability. However, because Quezada's Forms 1099 were missing the TlNs from some of his subcontractors, the second-level duty to collect backup withholding was triggered, requiring Quezada to file Forms 945 for tax years 2005 through 2008. Because Quezada was required, but failed, to conduct backup withholding and file Forms 945, the statute of limitations was not triggered. Therefore, the court concluded, the taxes assessed by the IRS were valid, allowed, and non-dischargeable.

For a discussion of the statute of limitations period, see Parker Tax ¶260,130. For a discussion of backup withholding and the requirement to file Form 945, see Parker Tax ¶251,503.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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