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.
