Is Sending A Form Taxpayer Self-Assessment?

 

There are times we need to remember that we are working with law.

Words in law can have very specific meanings.

Let’s look at three Code sections.

Code § 6201 - Assessment authority

(a) Authority of Secretary 

 

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title, or accruing under any former internal revenue law, which have not been duly paid by stamp at the time and in the manner provided by law. Such authority shall extend to and include the following:

(1)  Taxes shown on return

The Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists (or payments under section 6225(c)(2)(B)(i) are made under this title.

Code § 6211 - Definition of a deficiency

(a) In general

For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term "deficiency" means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of—

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus

(B) the amounts previously assessed (or collected without assessment) as a deficiency, over—

(2) the amount of rebates, as defined in subsection (b)(2), made.

Code § 6213 - Restrictions applicable to deficiencies; petition to Tax Court

(a) Time for filing petition and restriction on assessment

Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed  (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency. Except as otherwise provided in section 6851, 6852, or 6861 no assessment of a deficiency in respect of any tax imposed by subtitle A, or B, chapter 41, 42, 43, or 44 and no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 90-day or 150-day period, as the case may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final. Notwithstanding the provisions of section 7421(a), the making of such assessment or the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court, including the Tax Court, and a refund may be ordered by such court of any amount collected within the period during which the Secretary is prohibited from collecting by levy or through a proceeding in court under the provisions of this subsection. The Tax Court shall have no jurisdiction to enjoin any action or proceeding or order any refund under this subsection unless a timely petition for a redetermination of the deficiency has been filed and then only in respect of the deficiency that is the subject of such petition. Any petition filed with the Tax Court on or before the last date specified for filing such petition by the Secretary in the notice of deficiency shall be treated as timely filed.

Let’s talk about Ken and Juli Walker.

They filed a joint tax return for 2018.They reported adjusted gross income of approximately $110 grand, requesting a federal refund of approximately $2,100.

They left something out, however: Marketplace insurance for which they had received advance premium payments of $20,904.

COMMENT: The Marketplace refers to the Affordable Care Act, also known as Obamacare. One guesstimates his/her income for the upcoming year, and - if income is low enough - one is entitled to a subsidy. The subsidy can be handled one of two ways: first, as a monthly reduction of any premium otherwise due; second, as additional tax paid-in when filing the return next year. The advantage to the first is immediate reduction of premiums due now. The advantage to the second is dry powder in case one is over-subsidized. I do not immediately recall a client electing the second option.   

There is a potential problem, though. The subsidy is based on your income, and you are guessing at your income when you request the subsidy. Eventually you have to settle-up this guess by attaching a reconciliation to your tax return - Form 8962 – calculating what your subsidy should have been had you used the actual, final numbers on your tax return. If actual income is lower, you probably have a refund coming. If actual income is higher, you are probably writing a check to the IRS.

In September 2019 the IRS sent a notice requesting Form 8962.

In December 2019 the Walkers sent the 8962.

The IRS processed the form and in March 2020 sent a notice of assessment for $20,904, fully attributable to the ACA subsidy.

By October 2021 interest and penalties had swelled the balance to $27,297. The IRS issued a Notice of Intent to Levy.

The Walkers requested a Collection Due Process hearing.

COMMENT: The Notice of Intent to Levy starts a 30-day calendar on the taxpayer’s ability to stop the lien, which the Walkers did by requesting a CDP hearing.  Mind you, a CDP hearing is not an end-all. For example, one generally cannot contest the existence of the liability itself in a CDP. One would have gone through numerous notices to get to this point, and the IRS would have lost patience. If the taxpayer wants to contest the liability, he/she will have to consider alternatives such as audit reconsideration or an offer in compromise. The IRS wants a payment program as the product of a CDP hearing.

The Walkers requested an installment agreement. The reason they gave was as follows:

Taxpayers do not believe that they agreed to this assessment and do not understand it. If the assessment is correct, taxpayers dispute the penalties because of the IRS’s inactivity on the matter during the pandemic. If there is a liability, taxpayers request an installment agreement.”

There was back and forth, and in January 2024 the (IRS) Settlement Officer decided that the Walkers owed the tax. She did allude to the need for the taxpayers to do something more if they wanted to contest the tax liability itself:

Beside your general statement, you did not submit an amended return or a substantive reconsideration request.”

The taxpayers – surprisingly – withdrew their request for an installment agreement.

At this point, I would normally lose hope for the Walkers. I do not see an immediate way to avoid repaying the excess subsidy, but I nonetheless would have pressed for a payment plan. I would also have requested penalty abatement, as you won’t receive one without asking.

But there is a major technical issue here: had the IRS checked all the boxes to be able to collect the tax?

Let’s go back to the Code sections at the beginning of this post.

Section 6201 addresses what happens when you send in a return showing a tax liability: the system self-assesses. The IRS will ride piggyback on that assessment. Easy. Makes sense.

That is not what happened with the Walkers. The return as originally filed showed a refund, not a liability. The Walkers never filed a return that showed a liability. The Walkers sent a Form (8962) to the IRS, which the IRS processed and somehow generated a liability.

Question: did sending that 8962 create a liability that could be assessed?

We need to be careful with words here. No question the 8962 created a number that – when combined with other numbers on the return – resulted in a liability. What it did not do is show a liability on its own power. Somebody had to do math.

Here is an example: what if the taxpayer had inadvertently omitted estimated tax payments exceeding the subsidy recapture shown on Form 8962? There would be no additional tax, and there would be an additional refund instead.

Here is the Court:

However, we reject respondent’s additional contention that petitioners’ completion of Form 8962 reflects additional tax due which may be assessed under section 6201.”

If this is not an assessment under Section 6201, what is it?

It is a deficiency under Section 6211.

So what?

Look at the italicized portion of Section 6213 above.

… no levy or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer,….

A deficiency presumes that the IRS is matching, changing, moving, eliminating numbers. The IRS is doing math.

And the Code wants a notice mailed to the taxpayer alerting him/her of what the IRS is doing.

There are procedures for enforcing a deficiency, and one is key. We have called it many names over the years - a statutory notice of deficiency, a NOD, a SNOD, a 90-day letter. These are all terms for the following notice:

Code section 6213 requires the IRS to issue a SNOD before it can enforce a deficiency.

What did the IRS fail to do with the Walkers?

Yep, it failed to send a SNOD.

Here is the Court:

With respect to the proposed levy action before us - and having determined the IRS failed to issue a Notice of Deficiency despite … being legally required to do so - we hold that the IRS may not proceed with the collection of the Assessment.”

Howaboutthat?

The Walkers won their case on an especially narrow technical point. Still, a win is a win.

Our case this time was Walker v Commissioner, T.C. Memo 2026-4.

BMW’s $38.4 Million Tax Refund Claim

 

I had a partner who would likely snap if you mentioned a superseding tax return.

We had one go south. We electronically filed an individual tax return before April 15^th. We then learned that the return had omitted a significant transaction. Many tax practitioners would file an amended return after April 15 and square up with the IRS at that time. Since there was still time before April 15 and the dollars were enough to draw a significant penalty – and I have a big mouth – we decided to file a superseding return instead.

It did not go well. The IRS got surprised with the superseding, as it received a second return which was not marked “amended.” The IRS was paralyzed and assumed a filing mistake. The taxpayer had sent a check, which the IRS of course refunded. We had the client void and return the check, as taxes were due when the dust eventually settled. We could not resolve the matter administratively and wound up in Appeals. The issue was eventually resolved, but at needless time and cost – and a practitioner who may have forsworn superseding returns for the remainder of his career.

I am now looking at a case involving a $38.4 million tax refund and a superseding return.

With the above story as background, let’s start.

The case involves BMW US, itself a subsidiary of BMW AG (the German parent).

• The 2019 BMW US return was due April 15, 2020 and extended to October 15, 2020.

• BMW US filed its 2019 corporate (Form 1120) tax return on September 15, 2020.

• On October 14, 2020, BMW US filed a 2019 superseding Form 1120.

• On October 13, 2023 BMW US filed an amended 2019 return requesting a refund of $38,436,000.

COMMENT:  A C corporation return (such as the BMW US Form 1120) is initially due 3 and ½ months after year-end. For a calendar year-end return, that initial due date would be April 15. An extension is available for six months, making the extended due date October 15. A superseding return – by definition – must be filed on or before the due date (original or extended) of the return. We can see what BMW US was doing: it filed a 2019 superseding return on October 14, 2020 – one day before the extended due date. Had BMW US filed on October 16, it would have needed to file an amended return, as it would have been one day too late to file a superseding.

Let’s talk about superseding returns in general. To be fair, you can have a long and prosperous tax career and never file a superseding. Like so much of tax practice, it depends on your clients and what they get themselves into.

Think of a superseding return as a do-over. There is something on the initially-filed return that you want to change, and an amended return will not work (or work as well). There are elections, for example, that cannot be made on an amended return. A BBA partnership comes to mind. One does not amend a BBA partnership (unless one is able to elect out) the same way as other tax returns. There instead are special procedures - called the administrative adjustment request (AAR) process - which require IRS permission and which you must follow. I elect out of BBA for my partnerships whenever possible, as the AAR process is a pain.

The superseding - while its requirements are strict – steps into and takes the place of the initially-filed return.

Tax returns fall into three categories:

• Initial returns

• Superseding returns

• Amended returns

Initial and superseding returns filed before April 15 are deemed filed on April 15. The statute of limitations period begins on April 15.

Returns filed after April 15 but within a valid extension period are treated as filed on the date received by the IRS. The statute of limitations period begins on the date received.

Amended returns received after the valid extension period must be received within the statute of limitations period.

What happened to prompt BMW US to file a superseding?

On September 21, 2020 the IRS issued new Regulations addressing changes to depreciation under Section 168. More specifically, the changes were taxpayer-friendly, and BMW US wanted the new depreciation expense.

The Court found itself facing a new issue: when does the statute of limitations for refunds start when both initial and superseding returns are timely filed within an extension period?

The BMW US case went before the U.S. Federal Court of Claims.

The IRS position was straightforward:

• The initial 2019 return was due April 15, 2020.

• The 2019 return was extended to October 15, 2020.

• The return was filed on September 15, 2020. This is the initial return and begins the Section 6511 statute of limitations period for refunds.

• A superseding return was filed on October 14, 2020.        

• An amended return was filed October 13, 2023. This filing was outside the statute of limitations period, which started September 15, 2020 and expired September 15, 2023.

Code § 6511 - Limitations on credit or refund

(a) Period of limitation on filing claim

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.

(b) Limitation on allowance of credits and refunds

(1) Filing of claim within prescribed period

No credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in subsection (a) for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.

The IRS cited two Supreme Court decisions on its side: Zellerbach and National Paper Products. Those decisions however involved Section 6501, which is the statute of limitations for IRS assessment.

Code § 6501 - Limitations on assessment and collection

              (a) General rule

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

The Supreme Court reasoned that a second return acts as an amendment or supplement to the initially-filed return. What it did not do is toll a limitation (referring to Section 6501) which has already begun to run.

BMW US fired back:

• This is not a case involving Section 6501 (the statute of limitations for the IRS to assess tax). Rather it is a case involving Section 6511 (the statute of limitations for the IRS to issue refunds).

• That being so, reliance on Zellerbach and National Paper Products is misplaced.

• The court should rely instead on Haggar, which dates back to the era of excess-profit tax. Capital stock was included in the calculation of excess profit, and once that value was declared it could not be changed. Whether a superseding took the place of an initially-filed would have meant something. 

• In Haggar the taxpayer whiffed on the calculation of capital stock. Before the due date it filed a superseding return. The IRS refused to accept it. The case went to the Supreme Court, which reasoned with the concept of a “first return.” It decided that the superseding was a first return, and Haggar won its case.

• Relying on Haggar, the Section 6511 limitations period began on October 14, 2020, when the superseding return - that is, the “first return” - was filed.

• This would make the amended return (October 13, 2023) timely filed. 

The Court observed:

The parties have found no directly analogous precedent for determining the operative trigger to start the statute of limitations when the IRS provided a taxpayer with an extension, and both the initial and superseding returns are filed before that extended deadline.”

I agree. I do not remember ever seeing this fact pattern in my career.

The Court philosophized: there can only be one “initial” return.

The Court reasoned that both Zellerbach, National Paper Products, and Haggar could be read together without inconsistency. Haggar addressed the substance of the return, its elections and disclosures.  Zellerbach and National Paper Products instead addressed the Section 6501 statute of limitations. They were addressing different issues, so the decisions do not contradict.

BMW US noted that Zellerbach and National Paper Products were Section 6501 cases. This was not a Section 6501 case. It was instead a Section 6511 case. The two Sections could – depending on their drafting - yield different results, as the use of Section 6501 reasoning might not apply to a Section 6511 case.  

The Court was concerned that BMW US’ argument would whipsaw the IRS. A taxpayer could reset the three-year period for a refund under Section 6511 by timely filing a superseding return, whereas the IRS would have to use the initially-filed return for the three-year assessment period under Section 6501.

COMMENT: True, but if that is how Congress drafted it then Congress would have to change the law.

The Court decided that it would apply Zellerbach and National Paper Products to Section 6511, making BMW US’ $38.4 million refund request untimely. Except …

… there is another case in the works that might affect this decision.

It is the Kwong case. It comes out of the COVID era, when the IRS postponed numerous filing and payment deadlines.

These postponements are called “tolling” in tax jargon. Let’s say that you have 12 months to file something, but for whatever reason there is a toll of three months. You now have 15 months to file that something.

The Court called intermission on BMW US pending Kwong.

BMW US may yet have game.

Our case this time was BMW (US) Holding Corporation and Subsidiaries v United States, US Court of Federal Claims, No. 1:25-cv-01984.