The Importance of Marking A Return As “Final”

I have worked tax controversy for many years now. I have seen the system work well; I have seen the system work poorly. I would say – with some generosity – that the system has been on the downslope for several years now.

It may be as simple as a tax notice.

It may be – even more simply – failing to indicate that a particular tax filing is a “Final.” Perhaps the business has been sold or closed. Maybe the company discontinued a line of business and will no longer have that specific filing. Maybe the company is reorganizing to another state and will not have the origin state’s filing anymore. There can be a host of reasons for a final.

I am looking at one involving Albertina Camaclang doing business as “Europa Guest Home,” which we will abbreviate as “EGH.”

EGH was a small residential care facility in California. She sold the business in 2002. She however never marked “final” on her Form 941, which is the form to report (and remit) federal withholding and social security payroll taxes.

Sixteen years later (16, you read that correctly) there was a dispute. The IRS said they mailed a notice to EGH informing that they had never received Forms 941 for 2008.

COMMENT: Six years after the sale.

EGH said it never received the IRS notice.

And the IRS could not produce a copy of the letter nor proof that it was mailed.

But the IRS did kindly prepare Forms 941 showing unpaid liabilities of over $600 thousand. These are referred to a “substitutes for return” or “SFRs.” It is generally preferable to file a return rather than allow the IRS to prepare an SFR. The IRS is not concerned with deductions, for one thing. We are not told what EGH’s annual 941 liability was back in the day, a useful bit of information as we weigh the $600 grand.

The IRS filed liens.

COMMENT: Yep, predictable.

Off to Tax Court.

We are now in 2019. EGH hired a tax lawyer. The lawyer requested a Collection Due Process or Equivalent Hearing. EGH’s defense was straightforward: the business was sold long before 2008.

Go to 2020, and a settlement officer (SO) was assigned to the case.

And there was this:

The settlement officer learned of a parallel criminal investigation into petitioner, which delayed further work into the case. On February 15, 2023, the IRS lifted the suspension, and the settlement officer resumed work on the matter.”

OK then.

The SO wanted to schedule a conference with EGH on March 24, 2023. The SO also wanted paperwork to substantiate the sale of the business as well as original tax returns (meaning the 941s) for 2008.

COMMENT: Easiest tax returns ever: zero all the way down.

EGH requested access to its administrative file. This delayed the conference to June 5, 2023.

Which the IRS wanted later to reschedule. How about July 13^th?

EGH responded on July 19^th, explaining that it had received the notice that very day.

Back to rescheduling.

Mind you, EGH still had not provided documentation on the sale of the business.

COMMENT: I would have led with that documentation. I cannot help but wonder if something was afoot, which is how IRS CID had gotten involved.

The attorney finally provided the SO with a grant deed showing sale of the real estate.

COMMENT: What about the business located on that real estate, counselor?

The SO wanted to know why EGH filed Forms 941 for 2004 and 2005 if it was sold in 2002.

COMMENT: So do I.

The attorney argued that the IRS prepared these returns fraudulently.

COMMENT: Interesting persuasion skills being flashed there.

In the alternative, the attorney argued that the accountant was an idiot and incorrectly filed another entity’s return as EGH.

And here is an understated sentence:

While discussing these discrepancies, there was a ‘breakdown’ in communication between petitioner’s counsel and the settlement officer.”

To be a fly on the wall.

On August 29, 2023, a new settlement officer ….

I will interrupt here. I have practiced procedure for decades. I have never – barring illness or something like that – replaced an SO midstream. I am getting the impression that the most interesting parts of the story were not written down.

On August 29, 2023, the new SO reached out to explain why the IRS had filed SFRs and liens to back them up.

COMMENT: Self-serving, but OK.

The new SO requested new signed returns reporting zero liability filed by September 5,2023.

COMMENT: I would file them that very afternoon and end this nightmare.

On August 30, 2023, the IRS sent a letter acknowledging receipt of the returns. The IRS also enclosed Form 12257 Summary Notice of Determination and Waiver of Judicial Review.

EGH declined to sign the 12257.

The SO said fine. The IRS would nonetheless issue a notice of determination indicating a zero balance.

The IRS closed the file on September 1, 2023.

The IRS released the liens on October 27,2023.

The Tax Court closed the case.

COMMENT: I do not understand the reluctance to sign the 12257. Granted, one would lose certain procedural rights (such as the right to appeal), but EGH got everything it wanted: tax reduced to zero, interest and penalties likewise reduced to zero, liens released. What was left to fight over?

On October 6, 2023, EGH filed with the Tax Court for a review of the notice of determination.

COMMENT: Why? Let me keep reading…. EGH wanted reimbursement of approximately $50,000 for its litigation costs.

Folks, it does not work this way. The Tax Court had already decided and closed the case. EGH now wanted the Tax Court to resurrect the matter (the word is “vacate.”). Please stop already.

Would you believe that the Tax Court agreed to vacate?

EGH got its day. It now had to prove certain things – including being the prevailing party – to obtain reimbursement of its litigation costs.

EGH had pushed too far.

Remember: EGH had delayed at every turn. 

Here is the Court:

Petitioner is not the prevailing party. Accordingly, we need not consider whether petitioner unreasonably protracted proceedings or claimed ‘reasonable costs.’ Petitioner is not entitled to administrative or litigation costs.”

Our case this time was Albertina Camaclang d.b.a Europa Guest Home, Docket No. 15761-23L, filed April 23, 2025.