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IRS Won't Follow Court Ruling on Limitations Period for Backup-Withholding Assessments

(Parker Tax Publishing March 2022)

The IRS announced its nonacquiescence to the Fifth Circuit's holding in Quezada v. IRS, 2020 PTC 382 (5th Cir. 2020) - a decision in which the court concluded that the IRS was barred by the statute of limitations from assessing backup withhold liability on a business owner who made payments to nonemployees which he failed to report on Forms 945. According to the IRS, the Fifth Circuit incorrectly determined that the Forms 1099-MISC contained data sufficient to show that the taxpayer was liable for backup withholding taxes and to calculate the extent of the liability. AOD 2022-1.


Under Reg. Sec. 1.6041-1(a), payments of compensation for services rendered by nonemployees aggregating $600 or more generally must be reported on a Form 1099. Before the introduction of the Form 1099-NEC, Nonemployee Compensation, in 2020, such payments were reported on Form 1099-MISC, Miscellaneous Income. Among other identifying information, Reg. Sec. 301.6109-1(c) requires that the payor include on the Form 1099-MISC the payee's tax identification number (TIN). If the payor fails to provide the payee's TIN, Code Sec. 3406 requires the payor to withhold a flat rate of 24 percent for all payments to the payee and pay it over to the IRS (i.e., backup withholding). Reg. Sec. 31.6011(a)-4 provides that a person required to withhold backup withholding tax must file Form 945, Annual Return of Withheld Federal Income Tax. Code Sec. 6501(a)(3) imposes a three-year limitation period on tax assessments, beginning on the date a taxpayer files a "return required to be filed." However, under Code Sec. 6501(c)(3), in the case of a failure to file a return, the tax may be assessed at any time.

In Quezada v. IRS, 2020 PTC 382 (5th Cir. 2020), a taxpayer was required to withhold and pay over backup withholding because he failed to obtain the TIN of each laborer whom he paid as part of his business. For the tax years 2005 through 2008, the taxpayer failed to file Form 945 to report the backup withholding. The IRS asserted that under Code Sec. 6501(c)(3), the period of limitations on assessing backup withholding liability never began to run due to the taxpayer's failure to file Form 945. But the Fifth Circuit rejected that argument and held that Quezada's Form 945 was not required to be filed to trigger the running of the limitations period for assessing his backup withholding liability. Instead, the Fifth Circuit held that the limitations period began to run upon Quezada's filing of his Form 1040 and the Form 1099-MISC information returns that omitted payee TINs. The court reached this conclusion because it held that the Forms 1099-MISC contained data sufficient (1) to show that Quezada was liable for backup withholding taxes, and (2) to calculate the extent of this liability.

AOD 2022-1

In AOD 2022-1, the IRS announced that it will not follow the Fifth Circuit's decision in Quezada. According to the IRS, the omission of a payee's TIN on a Form 1099-MISC does not conclusively establish the payor's liability for backup withholding. Instead, backup withholding liability arises from the failure to obtain a payee's TIN, which the IRS said is not evident on the face of the Form 1099-MISC. The IRS reasoned that if, when he made payments, the payor had in his records the correct TINs for the payees, and he mistakenly omitted the information on Forms 1099-MISC, he would not have had backup withholding liability. Further, the IRS said that it could not calculate the extent of backup withholding liability simply by looking at the Forms 1099-MISC. According to the IRS, it could not know from looking at the face of the Forms 1099-MISC the reason for a missing TIN: whether the TIN was omitted because the payee did not provide the TIN to the payor (in which case backup withholding is indicated), or whether the payee did provide the TIN and the TIN was omitted due to filer error or for some other reason (in which case backup withholding may not be required). Thus, the IRS argued that a Form 1099-MISC with missing TINs by itself is not sufficient to establish withholding tax liability.

Additionally, the IRS noted that in Comm'r v. Lane-Wells Co., 321 U.S. 219 (1944), the Supreme Court held that the IRS may require, for the statute of limitations to begin to run, that a taxpayer provide tax information "with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished." In the view of the IRS, under Lane-Wells it is inappropriate to treat a payor's Form 1099-MISC information returns reporting payments to payees, in combination with the payor's individual income tax return, as "the return" that triggers the running of the period of limitations for assessing backup withholding liability. The IRS said this is because: (1) the Forms 1040 and 1099-MISC are separate returns that neither reference nor rely upon each other for either return to be complete; (2) neither the Form 1040 nor the Form 1099-MISC requires reporting backup withholding liability; and (3) the IRS has prescribed a separate Form 945 for a payor to report backup withholding liability and that is the form to which it looks in determining whether such liability exists.

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 ¶251,500.

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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