Taxpayer Filed a Valid Return, Despite Lack of Identity Protection PIN

(Parker Tax Publishing September 2020)

The Tax Court held that an electronically filed tax return that was rejected by the IRS for failure to include an Identity Protection Personal Identification Number (IP PIN) nevertheless started the running of the three-year statute of limitations period under Code Sec. 6501. The court rejected the IRS's argument that, by omitting an IP PIN, the taxpayer failed to file a valid return until he resubmitted the return with an IP PIN; and, because the taxpayer's initial return was valid, the court concluded there was no reason to toll the statute of limitations period until the second return was filed. Fowler v. Comm'r, 155 T.C. No. 7 (2020).

Background

Robin Fowler e-filed his 2013 Form 1040 on October 15, 2014 (October 15 submission). Fowler authorized Bennett Thrasher, LLP, a CPA firm, to file a return on his behalf in its capacity as an electronic return originator (ERO). Jeffrey Call, a partner at Bennett Thrasher, e-signed the 2013 Form 1040 with a Practitioner Personal Identification Number (PIN) and transmitted it directly to the IRS on October 15, 2014. Call received a Submission ID, which is a globally unique 20-digit number assigned to electronically filed tax returns.

The IRS's software received the October 15 submission that same day and sent Call a rejection notice, citing code "IND- 181" for failure to provide a valid Identity Protection Personal Identification Number (IP PIN) with the e-filed return. The IRS typically issues IP PINs to taxpayers who have been victims of identity theft. Fowler acknowledged that his identity was compromised in 2013. The IRS's records reflected that it sent Fowler an IP PIN on December 30, 2013, but Fowler claimed that he did not receive the IP PIN before making the October 15 submission.

Fowler resubmitted his 2013 Form 1040 on October 28, 2014 (October 28 submission), but subsequently received a letter in December 2014 notifying him that the IRS had not received his 2013 return. Call e-filed a 2013 Form 1040 on Fowler's behalf a third time on April 30, 2015 (April 30 submission). Fowler obtained an IP PIN from the IRS on or before April 30, 2015, and it was included in the April 30 submission. With the exception of the IP PIN, the tax information in the April 30 submission was identical to the information in the first and second submissions. The IRS's software reviewed and accepted the April 30 submission on the same day. The IRS sent Fowler a notice of deficiency for the 2013 tax year on April 5, 2018. Thereafter, Fowler filed a Tax Court petition challenging the notice on grounds that it was sent after the expiration of the three-year statute of limitations under Code 6501(a).

Under Code Sec. 6501(b)(1), the three-year statute of limitations period begins on the due date of the return if it is timely filed or on the actual filing date if the return is filed late. The Tax Court held in Appleton v. Comm'r, 140 T.C. No. 14 (2013), that the filing of a return triggers the limitations period if (1) the document that the taxpayer submitted constitutes a return, and (2) the taxpayer properly filed the return. Under Beard v. Comm'r, 82 T.C. 766 (1984), aff'd 793 F.2d 139 (6th Cir. 1986), a taxpayer filing constitutes a return if (1) it purports to be a return and provides sufficient data to calculate tax liability, (2) the taxpayer made an honest and reasonable attempt to satisfy the requirements of the tax law, and (3) the taxpayer executed the document under penalties of perjury (signature requirement).

The IRS argued that the IP PIN is a part of the signature requirement under Beard and that because the October 15 submission did not include an IP PIN, it failed the signature requirement and therefore was not a return. The IRS pointed out that the Internal Revenue Manual (IRM) states that an electronic return filed with a missing or incorrect IP PIN will be rejected. The IRS also said that it needs an IP PIN to authenticate the person who provides the return as the taxpayer he or she purports to be.

Tax Court's Analysis

The Tax Court found that Fowler's October 15 submission constituted a return under Beard and that Fowler properly filed it. Therefore, the court held that the limitations period expired before the IRS issued the notice of deficiency and granted summary judgment for Fowler.

The court found that the October 15 submission easily satisfied the first two prongs of the Beard test because it purported to be a return, was submitted on a Form 1040, and appeared to be an honest and reasonable attempt to comply with the tax laws. The court noted that the only difference between the October 15 submission (which the IRS rejected) and the April 30 submission (which the IRS accepted) was that the October 15 submission did not include an IP PIN. The court explained that the second prong of the Beard test was intended to distinguish a tax protester return from a return that on its face shows an attempt to properly report income and deductions, and in the court's view, Fowler's return did not belong in the tax protester category.

As to the third Beard requirement, the court noted that notwithstanding the IRS's authority under Code Sec. 6061 to prescribe forms or regulations defining the signature method for any return and to develop procedures for the acceptance of signatures in digital or other electronic form, there is little regulatory guidance as to what constitutes a valid signature. The court found that the instructions to the 2013 Form 1040 stated that to file electronically, the taxpayer must sign the return electronically using either a Self-Select PIN or a Practitioner PIN, and the court noted that Call included a Practitioner PIN on Fowler's e-filed return in accordance with the instructions. The court found no IRS guidance in the Form 1040 instructions or elsewhere characterizing an IP PIN as a signature. In the court's view, the IRS could not disavow the 2013 Form 1040 instructions, on which Fowler justifiably relied, to accommodate its litigation position.

The court rejected the IRS's reliance on the IRM, reasoning that an IP PIN does not become part of the signature requirement simply because the IRS's software will reject an e-filed return without it. The court found that the IRS's Modernized e-File (MeF) system, which the IRS uses to process e-filed returns, rejects returns for numerous errors that may not cause a return to fail the Beard test. The court also disagreed with the IRS's argument that it needs the IP PIN for taxpayer authentication purposes. The court noted that (1) the IRS acknowledged in CCA 201650019 that an element other than an e-signature may be needed to authenticate an electronic return; (2) when an ERO such as Bennett Thrasher prepares a return, the ERO is instructed to verify the taxpayer's identity, which seemed to make the IP PIN superfluous in Fowler's case; and (3) most fundamentally, Code Sec. 6061 puts the onus on the government to prescribe the signature method. On the last point, the court said that the Code does not require a taxpayer to deduce what constitutes a signature from the function of signatures in the legal world or the IRS's inherently esoteric authentication needs. The court concluded that, because Fowler's October 15 submission included a Practitioner PIN, which was identified as an e-signature in the Form 1040 instructions, the October 15 submission satisfied the Beard test and, accordingly, constituted a return for statute of limitations purposes.

The court also held that Fowler's return was properly filed under the second prong of the Appleton test based on an affidavit from Call stating that he submitted the 2013 Form 1040 to the IRS on Fowler's behalf. The court noted that Fowler provided a transmission log from Bennett Thrasher showing the 20-digit submission ID an e-filer receives after submitting a return. Most significantly, in the court's view, was the fact that the IRS acknowledged in its court filings that Fowler submitted a return on October 15, 2014, and that it was rejected because it did not include an IP PIN. The court explained that the filing inquiry focuses only on the mode of filing, not the content of the return, and the court noted that the IRS did not raise any issue with how Fowler delivered the October 15 submission to the MeF system.

For a discussion of the statute of limitations on assessments, see Parker Tax ¶260,130.

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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