Statute of Limitations on Trust Fund Recovery Penalty Was Not Triggered by Filing Form 941

(Parker Tax Publishing March 2024)

A district court held that a taxpayer that elected to file annual employment tax returns on Form 944, but instead filed a quarterly employment tax return on Form 941, did not file a return for purposes of the three-year statute of limitations for assessing trust fund recovery penalty (TFRP) under Code Sec. 6501(a). The court rejected the taxpayer's argument that the Form 941 plus other documents were sufficient to constitute a filing for the year at issue after finding that the combination of documents filed by the taxpayer were insufficient for the court to determine when the statute of limitations started running for the TFRP. Lagerkvist v. U.S., 2024 PTC 60 (N.D. Ind. 2024).

Background

Dawn Lagerkvist was the sole shareholder of Thrive Lagerkvist Medical Services, LLC (Thrive), a medical provider located in Marion, Indiana. In 2011, somebody on Thrive's behalf filed Form SS-4 with the IRS to obtain an Employer Identification Number (EIN). A Form SS-4 allows an employer to choose how it wishes to report its employment tax liability to the IRS. Thrive's Form SS-4 specified that it would file a Form 944 rather than filing quarterly Forms 941 to report its employment tax liability.

Despite electing to use Form 944, it appeared that Thrive attempted to file a properly signed Form 941 for the first quarter of 2012. In response, the IRS sent a letter to Thrive stating that it received a Form 941, Employer's Quarterly Federal Tax Return, for the March 31, 2012, tax period and directing Thrive to file the annual Form 944 instead. The letter also stated that "[a] notice was sent to you in February informing you that your filing requirement had been changed to Form 944" and "[s]ince you are required to file Form 944, Employer's Annual Federal Tax Return, for calendar year 2012, we will not process the Form 941." Thrive did not file any correction or revision to its Form SS-4 regarding its employment tax filing status.

Thrive did not file any Form 944 for the 2012 tax year. Thrive did timely file a Form 1120S, U.S. Income Tax Return for an S Corporation, in 2012 which included a schedule detailing an increase in payroll liabilities. And Thrive filed Form W-3, Transmittal of Wage and Tax Statements, with attached Form W-2s in 2012 which included information on wages and withholdings for all Thrive employees.

In May 2014, the IRS opened a substitute for return investigation of Thrive's Form 944 employment tax liability for the 2012 tax year. The IRS then assessed zero on Thrive's tax account for 2012 because no return had been filed. At the conclusion of its examination, the IRS assessed $137,639 (exclusive of penalties and interest) against Thrive in unpaid withholding taxes. The IRS then proposed an assessment of a Trust Fund Recovery Penalty (TFRP) against Lagerkvist on July 25, 2016, for Thrive's unpaid taxes. Lagerkvist timely appealed the proposed TRFP assessment and her appeal was denied. Five days later, the IRS assessed a TRFP against Lagerkvist in the amount of $93,594 for the unpaid portion of Thrive's 2012 employment tax liabilities.

Lagerkvist sued the government in a district court, requesting a refund of $93,594 which she paid for the TFRP. She contended that the "filing" of Thrive's first quarter Form 941 in 2012, partnered with other documents, constituted the filing of a "return" for the purposes of when the statute of limitations began to run. Her position was that the statute of limitations began running on April 15, 2013, and therefore any assessment for the tax year 2012 should have been made by April 15, 2016. According to Lagerkvist, the IRS's May 2017 TRFP assessment was untimely and she was entitled to a refund.

Lagerkvist cited the Fifth Circuit's decision in In re Quezada, 2020 PTC 382 (5th Cir. 2020), to support her contention that Thrive filed a return in 2012 which started the running of the statute of limitations. In Quezada, the Fifth Circuit disagreed with the IRS's contention that only the filing of the proper form can constitute a return. The Fifth Circuit held that, under the Supreme Court's decision in Comm'r v. Lane-Wells, 321 U.S. 219 (S. Ct. 1944), a return is filed (and the limitations clock begins) when the taxpayer files a return that contains data sufficient to (1) show that the taxpayer is liable for the tax at issue and (2) to calculate the extent of that liability. Lagerkvist believed that Thrive supplied sufficient documentation in 2012 - the first quarter Form 941, a Form 1120S, U.S. Income Tax Return for an S Corporation, and a Form W-3, Transmittal of Wage Statements - to show Thrive's liability for its employment taxes and calculate the extent of that liability.

The government filed a motion for summary judgment alleging that it timely assessed Lagerkvist's penalty and no refund was warranted. According to the government, Thrive was supposed to file a Form 944 rather than Forms 941. For the 2012 tax year, Thrive was required to report its employment tax obligations no later than April 15, 2013. Thrive never filed a Form 944 in 2012 or 2013; therefore, the assessment was timely because no event triggered the running of the three-year statute of limitations for the TFRP under Code Sec. 6501(a).

Analysis

The district court granted summary judgment for the government.

The court began by noting that, although a plurality of circuit courts follow the Quezada reading of Lane-Wells, the Seventh Circuit has not addressed that case. However, the court noted that the Seventh Circuit has applied the four elements of the test set forth by the Tax Court in Beard v. Comm'r, 82 T.C. 766 (1984). The Beard test requires that, to be considered a return, a submission must: (1) provide sufficient data to calculate tax liability; (2) be purported to be a return; (3) be an honest a reasonable attempt to satisfy the requirements of tax law; and (4) be executed under the penalty of perjury. The court noted that Lagerkvist never tried to rebut the government's argument that Thrive's filings did not satisfy the Beard test and therefore waived any such argument.

The court stated that, even if it were willing to apply the less rigorous Quezada standard, that case was readily distinguishable. Quezada was a bankruptcy proceeding involving a stonemason contractor that filed Forms 1099 for its subcontractors that lacked TINs, such that Quezada was required to file Forms 945. Quezada failed to do so, despite the IRS informing him several times of the deficiency. In 2014 the IRS assessed approximately $1.2 million against him for the amount that he failed to back up from 2005 to 2008. The assessment was made more than 3 years after Quezada filed the 1099s and a Form 1040 for the 2008 tax year. In the district court's view, Quezada was different from this case because Thrive never filed a Form 944 - the form required for the 2012. More damning, the court found, was that in Quezada the IRS's letters to the taxpayer did not tell him that the IRS was not processing the forms he submitted. The court noted that in this case, the IRS's June 2012 letter expressly stated that Forms 941 would not be processed. The court said that a ruling for Lagerkvist would essentially allow taxpayers to ignore explicit warnings from the IRS of improper filings that would not satisfy a return-filing requirement.

In addition, the court found that the combination of Thrive's first quarter Form 941, Form 1120S, and Form W-3 would not satisfy the Quezada standard if it applied. Lagerkvist argued that the IRS could have calculated liability based on the "total wages paid" and "payroll liabilities" reported on the From 1120S and the Form W-3, plus the IRS's knowledge of the amount of deposits Thrive actually made. But the court noted that Form 1120S does not report withholding or FICA, and the court found that without that information nothing else in the 1120S would be sufficient to calculate a taxpayer's trust fund liability. The court also noted that while Form W-3 does report Thrive's withholdings, the form is submitted to the Social Security Administration (SSA), not the IRS, and the SSA begins forwarding the information from the Form W-3 to the IRS throughout the remainder of the year. The court found that Lagerkvist did not show when Thrive's W-3 was filed with the SSA or when or if it was received by the IRS.

For a discussion of the statute of limitations on assessments of tax, 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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