Why You Always Use Certified-Mail For A Paper-Filed Return

Just about all tax returns are moving to electronic filing.

It makes sense. Our server sends a return to the government server, starting the automated processing of the return. Minimal manpower, highly automated, more efficient.

COMMENT: Electronic filing however does allow states and other filing authorities to include filing “bombs,” which can be very frustrating. We had a bomb recently with the District of Columbia. It could have been resolved – should have, in fact – but that would have required someone in D.C.  to answer our e-mail request or telephone call. Belatedly realizing this was a bar too high, we called the client to inform them of a change in plans. We would be paper filing instead.

Sometimes a state will say they never received a return. Our software maintains log events, such as electronic transmission of returns and their acceptance by the taxing authority. Tennessee has done this over the last few years as they updated some of their systems. Fortunately, the matter generally resolves when we present proof of electronic filing.

Do you remember when – not too many years ago – standard professional advice was to send tax returns using either certified or registered mail? That was that era’s equivalent of today’s electronic filing. We used to, back in the Stone Age, send our April 15^th individual extensions as follows:

·      Include multiple extensions per envelope. There could be several envelopes depending on the number of extensions.

·      Include a cover sheet detailing the extensions included in the envelope.

·      Certify the mailing of the envelope.

The problem with this procedure is that it could be abused. One could mail an empty envelope to the IRS, certifying the same. If any question came up, one could point to that envelope as “proof” of whatever. I do not know how often this happened in practice, but I recall having this very conversation with IRS representatives.

This reminds me of a recent case dealing with an issue arising from putting a paper-filed return in the mail. As we move exclusively to electronic filing, this issue will transition to history – along with rotary phones and rolodexes.

Let’s talk about the Pond case.

The IRS audited Stephen Pond’s return and made a mistake, concluding that Pond had underpaid his taxes. Pond paid the notice for tax due and interest on the 2012 tax year. The matter also affected 2013, so Pond overpaid his taxes for that year also. Pond’s accountant caught the mistake and filed for a refund for both years.

The accountant did the following:

(1)  He mailed the 2012 and 2013 tax refund claims in the same envelope to Holtsville, New York.

(2) He mailed a claim for refund of overpaid 2012 interest to Covington, Kentucky, which in turn forwarded the matter to Andover, Massachusetts.

Andover responded first. It wanted proof of the underlying 2012 filing (as the overpaid interest was for 2012). It took a while, but Pond eventually received his 2012 refund, including interest.

Time passed. There was no word about 2013. Pond contacted the IRS and was told the IRS never received the 2013 amended return.

COMMENT: While not said, I have a very good guess what happened. The IRS has had a penchant for stapling together whatever arrives in a single envelope. For years I have recommended separate envelopes for separate returns, as I was concerned about this possibility. It raised the cost of mailing, but I was trying to avoid the staple-everything-together scenario.

Pond sent a duplicate copy of his 2013 amended return.

Months went by. Crickets.

Pond contacted Holtsville and was informed that the IRS had closed the 2013 file.

Oh, oh.

A couple of weeks later Pond received the formal notice that the IRS was denying 2013 because it had been filed after statute of limitations had run.

Pond filed a formal protest. He filed with Appeals. He eventually brought suit in district court. The district court held against Pond, so he is now in Appeals Court.

This is tax arcana here that we will summarize.

     (1)  The general way to satisfy a statutory filing requirement is physical delivery.

(2)  Mail can constitute physical delivery.

a.    However, things can happen after one drops an envelope into the mailbox. The post office can lose it, for example. It would be unfair to hold someone responsible for a post office error, so physical delivery has a “mailbox” subrule:

If one can prove that an item was mailed, the subrule presumes that the item was timely delivered.

NOTE: Mind you, one still must prove that one timely put the item in the mail.

(3)  Congress codified the mailbox rule in 1954 via Section 7502. That section first included certified and registered mail as acceptable proof of filing, and the rule has been expanded over the years to include private delivery services and electronic filing.

(4) The question before the Court was whether Section 7502 supplanted prior common law (physical delivery, mailbox rule) or rather was supplementary to it.

a.    Believe it or not, the courts have split on this issue.

b.    What difference does it make? Let me give an example.      

There is an envelope bearing a postmark date of October 5, 20XX (that is, before the October 15^th extension deadline). The mail was not certified, registered, or delivered by an approved private delivery service.

If Section 7502 supplanted common law, then one could not point to that October 5 date as proof of timely filing. The only protected filings are certified or registered mail, private delivery service or electronic filing.

If Section 7502 supplemented but did not override common law, then that October 5 date would suffice as proof of timely mailing.

Let’s fast forward. The Appeals Court determined that Pond did not qualify under the safe harbors of Section 7502, as he did not use certified or registered mail. He could still prove his case under common law, however. Appeals remanded the case to the District Court, and Pond will have his opportunity to prove physical delivery.

My thoughts?

If you are paper filing – especially for a refund - always, always certify the mailing. Mind you, electronic filing is better, but let’s assume that electronic filing is not available for your unique filing situation. Pond did not do this and look at the nightmare he is going through.

Our case this time was Stephen K Pond v U.S., Docket No 22-1537, CA4, May 26, 2023.

 

Use Certified Mail With The IRS

I am looking at Baldwin v U.S., at least as much as I can between the September and October 15^th due dates.

In the blog equivalence of cinematic foreboding, the case comes out of the Ninth Circuit.

The Baldwins filed a 2007 joint tax return showing an approximate $2.5 million loss from a movie production business.

They filed to carry the loss back to 2005 for a refund.

They had three years to file the refund claim. The three years started with the filing of their 2007 return – that is, the year that showed the loss. They filed their 2007 return on extension, so three years later would be October 15, 2011.

They filed the refund claim on June 21, 2011.

Seems plenty of time.

They filed using regular mail.

The IRS said they never received the refund claim.

Problem.

The three years expired. Sorry about your luck, Baldwins, purred the IRS.

You know this went to court.

It went to a California district court.

And we get to talk about the mailbox rule.

There is a provision in the tax Code that timely-mailing-equals-timely filing with the IRS. That is the reason you hear (not as much now in the era of electronic filing) of people heading to the post office on April 15^th. Folks want to get that “April 15” stamped on the envelope, as that stamp means the return is considered timely filed with the IRS.

By the way, that provision did not enter the Code until 1954.

What did folks do before 1954?

They relied on common law.

Common law allows one to presume that a properly-mailed envelope will arrive in the ordinary time required to get from here to there. One would have to prove that one mailed the envelope, of course, but once that was done the presumption that the mail arrived in normal time would kick-in.

In 1954 Congress added the following:

§ 7502 Timely mailing treated as timely filing and paying.

(a)  General rule.

(1)  Date of delivery.

If any return, claim, statement, or other document required to be filed, or any payment required to be made, within a prescribed period or on or before a prescribed date under authority of any provision of the internal revenue laws is, after such period or such date, delivered by United States mail to the agency, officer, or office with which such return, claim, statement, or other document is required to be filed, or to which such payment is required to be made, the date of the United States postmark stamped on the cover in which such return, claim, statement, or other document, or payment, is mailed shall be deemed to be the date of delivery or the date of payment, as the case may be.

Section (c) is important here:

(c)  Registered and certified mailing; electronic filing.

(1)  Registered mail.

For purposes of this section , if any return, claim, statement, or other document, or payment, is sent by United States registered mail-

(A)  such registration shall be prima facie evidence that the return, claim, statement, or other document was delivered to the agency, officer, or office to which addressed; and

(B)  the date of registration shall be deemed the postmark date.

Section (c) is why accountants encourage the use of certified mail with tax returns.

But the Baldwins did not certify their mailing.

They instead argued that they met the common-law standard for timely filing.

Seems a solid argument.

The IRS went low.

There are Court cases out there (Anderson, for example) that decided that the common law standard continued to exist even after the codification of Section 7502. It makes sense – at least to me - as that is what common law means.

The IRS argued that Section 7502 did away with the common-law standard, and the cases deciding otherwise were decided erroneously.

Sounds like a truckload of fine-cut bull manure to me.

Let’s load the truck.

There was a case in 1984 called Chevron. From it came the Chevron doctrine, an administrative law principle that a government agency’s interpretation of an ambiguous or unclear statute should be respected by a court.

I get the concept.

The first thing the agency has to do is show that the statute is ambiguous or unclear.

Does Section 7502 appear ambiguous or unclear to you?

We are going to need a jump to get this truck going.

Let’s introduce National Cable & Telecommunications Association v Brand X. That case has to do with the internet and whether it is an information service or a telecommunication service.

Sounds boring.

Let’s look at the Ninth Circuit’s take-away from Brand X:

But [a] court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”

Let me translate that word salad:

Since the prior Court decisions (let’s use Anderson as an example) did not specifically say that the statute was unambiguous, the statute is therefore ambiguous.

Huh?

So, if I do not make clear that I am not a Robert Howard sword-and-sorcery, skilled, powerful and fearless giant weapon-wielding barbarian, then it can be deduced that I am that very said barbarian?

Cool!

Brand X lets me say that Section 7502 is ambiguous, at which point Chevron kicks-in and allows me to argue that the underlying statute means anything I want it to say.

There is an aisle for this at Borders. It is called “Fiction.”

The Baldwins did not get to rely on common-law. Since they could not meet requirements of Section 7502(c), they lost out altogether. No carryback refund for them.

Ohio Residency: Bright-Line and Common-Law Tests

How does one become an Ohio resident?

It’s not hard, I suppose. One could just buy a house in Ohio and live there.

How does one stop being an Ohio resident?

That one is a bit trickier. I would probably start by selling that same house and moving. It is a simple solution, but not one tailored to the needs of the snowbirds. I would not mind being a snowbird. Call me crazy, but I could separate myself from Cincinnati winters and spend that time in better weather.

Let’s say that you live in Cincinnati. You have a second home in Ft. Myers, Florida and a great deal of discretion as to how much time you spend in each state. You would like to move your “residency” to Florida, as Florida does not have an income tax. You still have friends and family in Cincinnati, however, so you intend to keep your house here. Can you do so and still be considered a Florida resident?

Of course you can.

Ohio is not one of those states that will chase you down to the ends of the earth to tax you years after you have left.

But that doesn’t mean there aren’t rules to follow.

And someone recently thought that those rules did not apply to them. The case is Cunningham v Testa. Let’s talk about it.

We have talked before about the idea of “domicile” in state taxation. Domicile is easy for the vast majority of us. We have one house, and we live there with our family. We have one house, one abode, one domicile. A house gives one an “abode,” and if one is fortunate one can afford more than one abode. Domicile rises above that. Domicile wants to know which abode is one’s true home: the one with the pencil markings measuring the kids’ height over the years, the squeaky floorboard at the top of the steps, the cold corner in the living room that never really warms up no matter how one sets the thermostat.

Domicile wants to know which abode is that house. You know - your home. The concept borders on the mystical.

Ohio is one the states that looks at domicile when determining whether one is a resident or nonresident. Ohio doesn’t care about that house in Florida. That is just an abode until one raises it to the level of domicile.

Remember that Ohio has a tremendous number of snowbirds. In years past the state expended a not-insignificant amount of resources reading tea lives and consulting Tarot cards to figure-out whether or not someone was an Ohio resident. Ohio needed something less employee-intensive.

Ohio decided to use a “bright-line” test and would henceforth look at “contact periods.” If one had enough contact periods it would consider one a resident. If not, it would consider one a nonresident … unless there were other factors indicating that one was a resident.  

For the most part it was now an arithmetic exercise. The “… unless” part was there to prevent one from gaming the count.

COMMENT: A contact period occurs if (1) one is away from his/her domicile (2) overnight and (3) is in Ohio for all or part of two consecutive days.  It is not the same as sleeping overnight in Ohio, as the test is not where one sleeps. One could book a hotel in Covington, Kentucky for example, and cross the bridge into Ohio in the morning. If one crossed the bridge for two consecutive days, there would be a contact period.

Ohio added up the contact periods. If there were at least 183, then Ohio considered one a resident.

            NOTE: Starting in 2015 that count has been raised to 213.

Back to the Cunninghams.

He filed an “Affidavit of Non-Ohio Domicile” for tax year 2008, using his name, social security number and Cincinnati address. She did not file anything.

COMMENT: Mrs. Cunningham is immediately out-of-the-game.

He declared he was a resident of Tennessee, although he did not give an address.   

            COMMENT: That did not help.

Nonetheless, filing the Affidavit shifted the burden to Ohio.

And Ohio responded by issuing a notice and then an assessment.

The Cunninghams appealed.

Time to show your cards, Ohio.

(1)   Cunningham and his wife were raised in Ohio and raised their children there.

COMMENT: Fail. What else do you have, Ohio?

(2)   He listed his Ohio address on his tax return.

COMMENT: Dumb but not fatal.

(3)   He had his Tennessee utility bills forwarded to Cincinnati for payment.

COMMENT: Same as (2), although I am wondering who was in Cincinnati to pay the bills if they were in Tennessee.

(4)   He maintained an Ohio driver’s license.

COMMENT: That guy, he is such a procrastinator …

(5)   He voted in Ohio during the year.

COMMENT: Did no one advise this guy?

(6)   He did not present a calendar of contact periods.

COMMENT: He’s got this ADD thing with paperwork …

(7)   He filled-out paperwork to obtain homestead exemption on his Cincinnati residence.

COMMENT: Really?! I mean it, REALLY???

Let’s just say that the Tax Commissioner persuaded the Ohio Supreme Court that any affidavit Cunningham filed was bunkum. Cunningham was an Ohio resident under common-law tests. The bright lines rules – while invaluable – are not an absolute defense against the common-law tests for residency.

There has been some hyperventilation in the wake of this decision. Here is an example from the Ohio Society of CPAs:

This ruling will encourage even more litigation whenever the commissioner decides to challenge an affidavit as ‘false,’ and will render almost meaningless the recent increase in allowable contact periods from 182 to 212.”  

No, no it doesn’t, and I greatly doubt that Ohio wants to get into repetitive shootouts with taxpayers on this issue. That is why Ohio moved to a bright-line standard in the first place.

Just have some common sense out there, folks.