An Expiring Six Figure Tax Refund

We had an unusual client situation this 2020 tax-season-that-refuses-to-go-away.

It involved a high earner and a private plane.

More specifically, buying a private plane.

The high earner bought the plane in 2016, which meant there was a dollar-for-dollar depreciation deduction if the plane was successfully placed in business use. While that may sound simple enough, there is a high wall in the tax Code (specifically, Section 280F(d)(6)(C)(ii)) that one has to scale. The IRS is onto wealthy taxpayers buying a plane for “business” use, using it also for personal reasons and reporting relatively minimal income for that personal use under the SIFL rules.

COMMENT: Think of the SIFL rules as picking up mileage-rate income for your personal use of a company car.

It took a while to resolve the issues involved in this return. We prepared and the client filed his 2016 return in 2020. We filed on paper, as it was too late to electronically file. Going into COVID, mind you, when soon there would be no one at the IRS to open the mail. In fact, at one point the IRS estimated that it had over 10 million pieces of unopened mail to process.

Not the best-case scenario, but I was not immediately concerned.

Until our client received an IRS letter that the period for claiming a 2016 tax refund was about to expire.

That amount was six figures.

Let’s talk about the tax statute of limitations.

There are different sides to the statute of limitations.

In general, we know that there is a three-year statute for the IRS to look at one’s return. If you filed, for example, your 2016 tax return on April 15, 2017, the IRS has until April 15, 2020 (barring unusual circumstances) to look at and change your return.

The technical term for any additional taxes is “assessment”, and the IRS has 10 years to collect any taxes assessed. You there have a second limitations period.

But what if the IRS owes you?

Let’s say that you have a refund for 2016. You are in no hurry to file, because there is nothing for the IRS to chase down. You have a refund, after all.

That three-year statute flips and can now be your enemy.

You have to claim that refund within three years.

What if you don’t?

Then you lose it.

You had better file that 2016 tax return by April 15, 2020.

Let’s go tax nerd here.

Technically, there are two limitations periods running concurrently. You have to meet both of them to get to your refund.

(1)  You have to file a refund claim within three years of filing the return.

There is some technical mumbo-jumbo here. Since you never filed a return, the filing serves as both a return and a claim (for refund). You would easily meet the three-year test as filing the return also counts as filing a claim. You did both at the same time.

That, however, is not the problem.

(2)   Taxes paid within the preceding three-year period are recoverable.

The taxes for 2016 were considered paid-in as of April 15, 2017 (when the return was due). As long as you get that return/claim in by April 15, 2020, you are good, right?

Who was not working on April 15, 2020?

The IRS, that‘s who.

Nor many CPA firms. If CPAs were working, odds are they were working in a diminished capacity.  

Still, our return was filed before April 15, 2020, so was there need to be concerned that it was sitting in a trailer with millions of other returns?

And didn’t many deadlines got extended to July 15, in any event?

That answer is fine until the client begins to panic. Did the period run out on April 15? Is the period running out on July 15? ARE YOU SURE?

My partner was anxious: should we call the IRS? Should we file another claim? Should we request an extension of the statute?

Ixnay on that last one, champ.

We had one more card to play.

Guess what extends the three-year lookback period for recoverable taxes?

An extension, that’s what, and our client had one for 2016.

No matter what, our client’s lookback period for taxes goes through October 15, 2020. The client has three years and six months to get to those taxes.

I am, by the way, a fan of routine extensions for tax returns of complexity. COVID has given me another reason why.

Happy client.

Crazy year.