I was contacted recently to inquire about my interest in a proceduralist opportunity.
That raises
the question: what is a proceduralist?
Think about
navigating the IRS: notices, audits, payment plans, innocent spouse claims,
liens and so on. One should include
state tax agencies too. During my career, I have seen states become
increasingly aggressive. Especially after COVID – and its drain on state
coffers - I suspect this trend will only continue.
I refer to
procedure as “working the machine.” This is not about planning for a
transaction, researching a tax consequence or preparing a tax return. That part
is done. You have moved on to something else concerning that tax return.
Less
glamorously, it means that I usually get all the notices.
Let’s go procedural
this time.
Let’s talk
about the difference between an abatement and a refund.
Mr Porporato
(Mr P) filed a return for 2009. He owed approximately $10 grand in taxes.
He did not
file for 2010 or 2011. The IRS prepared returns for him (called a Substitute
Return), and he again owed approximately $10 grand for each year.
COMMENT: He had withholding but he still owed tax for each year. He probably showed have adjusted his withholding, but, then again, he went a couple of years without even filing. I doubt he cared.
The IRS came
a-calling for the money, and Mr P requested a Collection Due Process hearing.
COMMENT: I agree, and that is what a CDP hearing is about. Mind you, the IRS wants to hear about payment plans, but at least you have a chance to consolidate the years and work-out a payment schedule.
There was
chop in the water that we will not get into, other than Mr P’s claim that he
had a refund for 2005 that was being ignored.
So what
happened with 2005?
Mr P and his
(ex) wife filed a joint 2005 return on June 15, 2006.
Then came a
separation, then a divorce, then an innocent spouse claim.
Yeeessshhh.
He amended
his 2005 return on March 29, 2010. The amended return changed matters from tax
due to a tax overpayment. The IRS abated his 2005 liability.
There you have
the first of our key words: abatement.
Let’s review
the statute of limitations (SOL). You generally have three years to file a tax
return and claim your refund, if any. Go past the three years and the IRS keeps
your refund. There are modifiers in there, but that is the general picture. We
also know the flip side of the SOL: the IRS has three years to examine your
return. Go past three years and the IRS cannot look at that year (again, with
modifiers). Why is this? It mostly has to do with administration. Somewhere in
there you have to close the matter and move on.
Let’s point
out that Mr P amended his 2005 return after more than three years. The IRS still
reversed his tax due.
Can the IRS
do that?
Yep.
Why?
An IRS can
abate at any time. Abatement is not subject to the restrictions of the SOL.
Abatement
means that the IRS reducing what it wants to collect from you.
But the
result was an overpayment.
Mr P wanted
the IRS to refund his 2005 overpayment – more specifically, to refund via
application of the overpayment to later tax years with balances due.
This is not
the IRS reducing what it wants to collect. This is in fact going the other way:
think of it as the IRS writing a check.
Wanting the
IRS to write a check ran Mr P full-face into the statute of limitations. He filed
the 2005 amended outside the three-year window, meaning that the SOL on the
refund was triggered.
I get where
Mr P was coming from. The IRS cut him slack on 2005, so he figured he was
entitled to the rest of the slack.
He was wrong.
And there
you have the procedural difference between an abatement and a refund. The IRS
has the authority to reduce the amount it considers due from you, without
regard to the SOL. The IRS however does not have the authority to write you a
check after the SOL has expired.
Another way
to say this is: you left money on the table.
Our case
this time was Porporato v Commissioner (TC Summary Opinion 2020-24).
