Proving A Timely Tax Filing

 

I admit that I am biased, but I am not a fan of filing late tax returns.

Call it Murphy’s Law:

If anything can go wrong, it will.”

I am looking at a Tax Court order. An order takes place while the case is at trial. Somebody makes a motion, the Court reviews and decides. That decision is called an order, and they are common.

The IRS filed a motion that it sent a timely Notice of Deficiency to a taxpayer.

COMMENT: A Notice of Deficiency (also called a 90-day letter, a NOD or SNOD) is the IRS determining that you owe additional tax and wanting to reduce it to assessment. Why an assessment? For one thing, the IRS (usually) has 3 years to examine and adjust your return. It has 10 years to collect an assessment. That alone is a powerful incentive.

There are rules, of course. The IRS has only so much time to send the SNOD, and you have only so much time to respond to it. In general, the IRS has three years from when you filed the return or when the return was originally due, whichever is later. There are exceptions. A key one, and one will talk about today, is if you never file a tax return.

Milton Thomas Roberts failed to file a timely return for 2014. He received a notice from the IRS in 2015 asking about it. In February 2016 he went to the post office and mailed four packages: two to the IRS and two to New York state.

COMMENT: He was filing his 2013 and 2014 taxes with the IRS and New York – hence four packages. He did so correctly: he used certified mail. Yes, it costs a few dollars, but – if you ever must prove the mailing – those are the best dollars you ever spent.

About a week later the IRS acknowledged receiving his 2013 return.

COMMENT: Having the benefit of hindsight, one wonders why the IRS did not confirm 2014. To his credit, Roberts went online and confirmed that all four packages had been delivered.

For 2016 through 2019 Robers received notices from the IRS about this tax year or that, but he never received a notice about 2014.

That changed in October 2019, when the IRS sent a notice saying it never received a 2014 return.

Roberts did not immediately respond.

In February 2020, the IRS issued a SNOD showing over $275 grand of tax due.

That caught his attention.

Roberts (re)prepared his 2014 return and sent it to the IRS on or around June 2020. It showed adjusted gross income of $587 grand and a small refund of $804.

What happened to his copy of the original 2014 sent in 2016?

No idea.

Having attracted unwanted attention, Roberts was now audited for 2014. The IRS issued a second SNOD in January 2022 for $79 grand in additional tax, along with the usual interest and penalties.

You already know they are in Tax Court. Both sides agree that Roberts filed a 2014 return. Roberts argues that he filed twice – once in 2016 and again in 2020. The IRS says: nay, nay; he filed only once and that was in June 2020.

Does it matter?

Oh, yes it does.

Remember that the IRS has three years (barring oddities) to adjust his return and assess additional taxes. Roberts asserts that he filed 2014 in February 2016. Add three years and the IRS had until February 2019 to adjust and assess.

Roberts received nothing from the IRS in 2019.

Roberts says the IRS is too late. The second SNOD is incorrect and without effect.

The IRS disagrees. They say they never received the 2014 return until June 2020. Add three years and they had until June 2023 to adjust and assess. They were easily within the window.

The IRS just filed a motion requesting the Tax Court to determine that 2014 was within the window and they had filed a correct and effective SNOD.

Judge Toro denied the motion.

Why?

There is enough doubt as to what happened. Roberts had certified mail receipts, confirmation from New York of receiving 2013 and 2014 returns, confirmation from the delivery company that all four packages had been delivered, as well as a conspicuous absence by the IRS for three ½ years concerning the 2014 tax year.

Judge Toro was not going to say that the IRS had proved their case.

Mind you, that does not mean that Roberts proved his case either.

It does mean that the case revolves on whether there was a 2014 filing in 2016.

The IRS usually has the upper hand in such matters.

But Roberts brings the receipts.

You may wonder: does the IRS sometimes lose returns?

Oh yes. They have done so with me. I remember one client specifically because it impacted a scheduled real estate closing. We resolved the matter, but it involved considerable time and stress.

I will be keeping an eye out for the resolution of the Roberts story.

My hunch: he will win.

But he is in Tax Court. He is not pro se, so he is paying for an attorney. And he will keep paying, as a motion has been decided but the case itself marches on.

Which makes me wonder: could he have avoided this by simply filing a timely tax return?

As I said, I am biased.

Our case (or motion, actually) this time is from Milton Thomas Roberts v Commissioner, Tax Court docket 7011-22.

New Rules for 2026 Charitable Contributions

 

I have been going through the provisions of the new tax bill (One Big Beautiful Bill Act), which I refer to as OB3 (Oh Bee Three). I like the Star Wars reverb to it.

You ever wonder how the tax Code gets so complicated?

I can understand if one is already in a complex area to begin with. Take an international conglomerate, sprinkle in some treaty relief, add transfer pricing creativity and bake off for FDDEI minutes and it makes sense.

But what about something routine – something like charitable contributions?

Let’s talk about OB3 and contributions.

We will separate our discussion into two sections: contributions for C corporations and contributions for individuals.

C Corporations

For years, the rule for C corporation contributions has been simple: there is a limit of 10% of taxable income before any charitable deduction.

EXAMPLE ONE:

Blue Sky Corp has taxable income of $1 million before a charitable deduction of $105,000. Blue Sky can deduct $100,000 ($1 million times 10%). The $5,000 balance carries forward to the next tax year.

Let’s call that 10% the ceiling. It has been tax law since I came out of school.

OB3 has introduced a floor. The new law is that C corporation contributions are allowed only to the extent they exceed 1% of taxable income before any charitable deduction.

EXAMPLE TWO:

Let’s return to Blue Sky, which made charitable contributions of $9,000. Well, 1% of $1 million is $10 grand. $9 grand is less than $10 grand, so Blue Sky gets no deduction at all.

But wait, it gets better.

There is a macabre dance between the ceiling and the floor.

·       Contributions in excess of the 10% ceiling may be carried forward.

·       Contributions cut off at the knees by the 1% floor may be carried forward, BUT ONLY IF the corporation’s contributions exceed the ceiling.

What are they talking about?

The ceiling (sub) rule has been with us for decades. In Example One, the $5,000 may be carried forward up to five years.

The floor (sub) rule is … peculiar.

Let’s go back to Example Two. Blue Sky did not clear the floor and did not exceed the ceiling. Blue Sky loses that $9 grand as a deduction forever. Blue Sky is grey.

Let’s tweak Example Two and call it EXAMPLE THREE:

Blue Sky makes contributions of $125,000.

Blue Sky loses the first 1%, which is $10 grand ($1 million times 1%).

At this point we still have $115,000 at play.

To be cut off at $100 grand, leaving $15,000.

However, since Blue Sky exceeded BOTH the ceiling (by $15 grand) and the floor, it gets to carryforward both the $15 grand (ceiling) and the $10 grand (floor) for a total carryforward of $25 grand.

Another way to say this is: if you clear both the floor and the ceiling, you are back to the old rule ($125,000 minus $100,000).

But look at the hoops you must go through to get back to where you were.

Congress has malintent, methinks.

Individuals

We also have a shiny new contribution floor for individuals. The floor is ½ of 1%, so it is less than a corporation.

The new rule for Individual contributions works solely off the floor, so we avoid the double Dutch dilemma of Example Three.  

On to EXAMPLE FOUR:

Bo Runs-Like-A-Gazelle plays in the NFL and makes $7 million.

Bo’s charitable floor is $7 million times .005 = $35 grand.

Bo makes contributions of $33,000 grand.

Bo did not clear the floor, so Bo gets no charitable deduction.

However, does Bo at least get to carryforward the $33 grand?

No, Bo does not.

Bo is hosed.

Let’s tweak for EXAMPLE FIVE:

Same as Example Four but Bo donates $50 grand.

His floor is still $35 grand.

Bo has a deduction of $15 grand.

However since Bo cleared the floor, he gets to carry over the $35 grand (the floor) to future tax years.

Bo is less hosed.

There is another grenade from OB3 that might also affect Bo: if his tax rate ever exceeds 35%, the tax benefit from a charitable contribution will stop at 35%. We will leave that tax twister for another day.

There is a positive provision in OB3 for nonitemizers: beginning in 2026 one will be able to deduct $1,000 (if single) or $2,000 (if married) for cash contributions. Yep, you will be able to claim the standard deduction and another grand (or two), assuming you made contributions. It's something.  

Congress continues to add complexity to the Code, and not just for heavy hitters like Bo. Unfortunately, these rules might (in fact, they probably will) affect you and me – average folk. So why did Congress do it?  Same reason junkies steal: Congress is addicted. There is no other reason for nonsense like this.

How will tax advisors react? We will educate clients on ceilings and floors, and we will continue to emphasize “bunching.” Bunching means that you make an oversized donation in one year and a much smaller (or no) donation the following year. It can be rough on the receiving charity (can you imagine budgeting), but what are you (as a donor) to do?