Penalties For Cash Reporting Failures

 

It would be a vast understatement to say that the plucky Rebellion had software issues this busy season.

We saw (some of) it coming … given the merger and all. Short of Excel and Word, there was little overlap between our softwares - that is, our preparation software, research software, time reporting, invoicing and receipt, monitoring the accounting practice and whatnot.

We are still working through the shock.

And I see a Tax Cout decision issued about a week ago concerning software.

I can tell you before reading it how the Court will decide:

Software – unless involving matters exceeding the minds of mortal men – will not save one from penalties. If one purchases and installs software, one is under obligation to learn and master it.

My thoughts?

I am divided. An ordinary taxpayer does not – should not - need my services. Reach a certain point though, and a tax professional becomes as necessary as a primary physician or a dentist.

Still, the Code has become increasingly complex since I came out of school. The very computerization that has allowed professionals to streamline and systematize their work has simultaneously allowed the Congressional tax committees to draft and score increasing complex and near-unworkable changes to the Code. Far too many of these changes can potentially reach ordinary taxpayers. That taxpayer would probably not know that he/she wandered into a minefield. He/she would learn of it when the penalty notice arrived, however. The IRS (and too often the courts) presume that you have a graduate degree in taxation – ignorance of the law is no excuse and all that flourish. They do not care that you don’t.

Dealers Auto Auction of Southwest LLC (Dealers) was an Arizona company selling vehicles through auction houses. It frequently received cash in the ordinary conduct of its business. Not surprisingly, the cash from a sale would often exceed $10,000.

There is a Code section involved here:

          Section 6050I

(a)  Cash receipts of more than $10,000

Any person

(1)  Who is engaged in a trade or business, and

(2)  Who in the course of such trade or business, receives more than $10,000 in cash in 1 transaction (or 2 or more related transactions),

shall make the return described in subsection (b) with respect to such transaction (or related transactions) at such time as the Secretary may by Regulations prescribe.

Once Sec 6050I is triggered, the company files Form 8300 with the IRS. It is an information return (no taxes go with it), but there are penalties for failure to file the return.

Not surprisingly, it has its own rules and subrules.

You know the Forms 8300 were an issue for Dealers.

They bought software (AuctionMaster) to deal with it.

They bought the software after flubbing the 2014 Form 8300 filings. The IRS assessed penalties of over $21 grand, and Dealers realized that buying software was cheaper than paying penalties.

And … the IRS was back in 2016.

Why?

Dealers filed 116 Forms 8300. The IRS argued that Dealers should have filed 382.

The IRS wanted over $118 grand in penalties.

Yipes!

Here is the Court:

Dealers Auto was not immediately aware of its failures. Instead, it was not until the Commissioner began the examination that Dealers Auto became aware of its noncompliance.”

Dealers was blindsided.

It took immediate steps:

·       It contacted the software provider and learned that improved aggregation features were available starting in 2017 (the year following the audit year).

·       Dealers quizzed the auditor on the subtleties of Form 8300 and its filing requirements.

·       Dealers changed its procedures and internal control for filing 8300s.

·       Dealers changed to electronic filing of the 8300s. They let the software cook.

No way the IRS was going to retract that $118 grand-plus assessment, though.

Dealers appealed the penalty. It wanted abatement for reasonable cause.

COMMENT: So would I, frankly.

Dealers’ argument was straightforward: we relied on software, and the software malfunction was outside of our control.

The IRS responded: there was no malfunction. You never mastered the software. If you had, you would have realized that it was not functioning as you thought.

Harsh, methinks. Probably honest, though.

Here is the Court:

Dealers Auto failed to establish that there was a software failure.”

The instructions for the software suggest that the software prepared Forms 8300 for printing, but Dealers Auto asserts that the software files the forms on the user’s behalf.”

Even assuming Dealers Auto met its burden to show a failure beyond the filer’s control, the record does not support a finding that Dealers Auto acted reasonably before or after the failure. For example, Dealers Auto did not establish that it was correctly using the software or that data was being entered correctly into the system.”

Dealers Auto argues that it reasonably believed the software was working as intended because it was generating some information returns. But the record shows that Dealers Auto software prepared only 116 Forms 8300 in 2016. The record also shows that Dealers Auto was required to file at least 212 Forms 8300 in 2014.”

This is going poorly.

What do I see?

I see a small business that was surprised in 2014. It responded with technology, but its familiarity with technology appears limited. It got surprised again. Normally that would indicate recidivism, but I don’t think that is what happened here. I think Dealers had only so many resources to throw at a problem. In addition, they may not have realized the extent of the problem if they were quizzing the IRS auditor on the ins and outs.

What did the Court see?

While it is not necessary to show that Dealers Auto made every data entry correctly, the record offers the Court no insight as to Dealer Auto’s installation, training, or use of the software.”

Here it comes:

Dealers Auto failed to establish that it has reasonable cause for its failure to file information returns for 2016.”

What disappoints me about cases like this is the failure to reward a taxpayer’s effort. Dealers tried. It bought software. It was filing, albeit not as much as it was supposed to. Should it have expended more money and resources on the matter? Clearly, but then I should have played in the NFL and retired as a Hall of Famer. The IRS is punishing Dealers like a scofflaw who did not care, made things up and never intended to follow the rules. To me, applying the same penalties to both situations is abusive.

Our case this time was Dealers Auto Auction of Southwest LLC v Commissioner, T.C. Memo 2025-38.

The Importance of Marking A Return As “Final”

I have worked tax controversy for many years now. I have seen the system work well; I have seen the system work poorly. I would say – with some generosity – that the system has been on the downslope for several years now.

It may be as simple as a tax notice.

It may be – even more simply – failing to indicate that a particular tax filing is a “Final.” Perhaps the business has been sold or closed. Maybe the company discontinued a line of business and will no longer have that specific filing. Maybe the company is reorganizing to another state and will not have the origin state’s filing anymore. There can be a host of reasons for a final.

I am looking at one involving Albertina Camaclang doing business as “Europa Guest Home,” which we will abbreviate as “EGH.”

EGH was a small residential care facility in California. She sold the business in 2002. She however never marked “final” on her Form 941, which is the form to report (and remit) federal withholding and social security payroll taxes.

Sixteen years later (16, you read that correctly) there was a dispute. The IRS said they mailed a notice to EGH informing that they had never received Forms 941 for 2008.

COMMENT: Six years after the sale.

EGH said it never received the IRS notice.

And the IRS could not produce a copy of the letter nor proof that it was mailed.

But the IRS did kindly prepare Forms 941 showing unpaid liabilities of over $600 thousand. These are referred to a “substitutes for return” or “SFRs.” It is generally preferable to file a return rather than allow the IRS to prepare an SFR. The IRS is not concerned with deductions, for one thing. We are not told what EGH’s annual 941 liability was back in the day, a useful bit of information as we weigh the $600 grand.

The IRS filed liens.

COMMENT: Yep, predictable.

Off to Tax Court.

We are now in 2019. EGH hired a tax lawyer. The lawyer requested a Collection Due Process or Equivalent Hearing. EGH’s defense was straightforward: the business was sold long before 2008.

Go to 2020, and a settlement officer (SO) was assigned to the case.

And there was this:

The settlement officer learned of a parallel criminal investigation into petitioner, which delayed further work into the case. On February 15, 2023, the IRS lifted the suspension, and the settlement officer resumed work on the matter.”

OK then.

The SO wanted to schedule a conference with EGH on March 24, 2023. The SO also wanted paperwork to substantiate the sale of the business as well as original tax returns (meaning the 941s) for 2008.

COMMENT: Easiest tax returns ever: zero all the way down.

EGH requested access to its administrative file. This delayed the conference to June 5, 2023.

Which the IRS wanted later to reschedule. How about July 13^th?

EGH responded on July 19^th, explaining that it had received the notice that very day.

Back to rescheduling.

Mind you, EGH still had not provided documentation on the sale of the business.

COMMENT: I would have led with that documentation. I cannot help but wonder if something was afoot, which is how IRS CID had gotten involved.

The attorney finally provided the SO with a grant deed showing sale of the real estate.

COMMENT: What about the business located on that real estate, counselor?

The SO wanted to know why EGH filed Forms 941 for 2004 and 2005 if it was sold in 2002.

COMMENT: So do I.

The attorney argued that the IRS prepared these returns fraudulently.

COMMENT: Interesting persuasion skills being flashed there.

In the alternative, the attorney argued that the accountant was an idiot and incorrectly filed another entity’s return as EGH.

And here is an understated sentence:

While discussing these discrepancies, there was a ‘breakdown’ in communication between petitioner’s counsel and the settlement officer.”

To be a fly on the wall.

On August 29, 2023, a new settlement officer ….

I will interrupt here. I have practiced procedure for decades. I have never – barring illness or something like that – replaced an SO midstream. I am getting the impression that the most interesting parts of the story were not written down.

On August 29, 2023, the new SO reached out to explain why the IRS had filed SFRs and liens to back them up.

COMMENT: Self-serving, but OK.

The new SO requested new signed returns reporting zero liability filed by September 5,2023.

COMMENT: I would file them that very afternoon and end this nightmare.

On August 30, 2023, the IRS sent a letter acknowledging receipt of the returns. The IRS also enclosed Form 12257 Summary Notice of Determination and Waiver of Judicial Review.

EGH declined to sign the 12257.

The SO said fine. The IRS would nonetheless issue a notice of determination indicating a zero balance.

The IRS closed the file on September 1, 2023.

The IRS released the liens on October 27,2023.

The Tax Court closed the case.

COMMENT: I do not understand the reluctance to sign the 12257. Granted, one would lose certain procedural rights (such as the right to appeal), but EGH got everything it wanted: tax reduced to zero, interest and penalties likewise reduced to zero, liens released. What was left to fight over?

On October 6, 2023, EGH filed with the Tax Court for a review of the notice of determination.

COMMENT: Why? Let me keep reading…. EGH wanted reimbursement of approximately $50,000 for its litigation costs.

Folks, it does not work this way. The Tax Court had already decided and closed the case. EGH now wanted the Tax Court to resurrect the matter (the word is “vacate.”). Please stop already.

Would you believe that the Tax Court agreed to vacate?

EGH got its day. It now had to prove certain things – including being the prevailing party – to obtain reimbursement of its litigation costs.

EGH had pushed too far.

Remember: EGH had delayed at every turn. 

Here is the Court:

Petitioner is not the prevailing party. Accordingly, we need not consider whether petitioner unreasonably protracted proceedings or claimed ‘reasonable costs.’ Petitioner is not entitled to administrative or litigation costs.”

Our case this time was Albertina Camaclang d.b.a Europa Guest Home, Docket No. 15761-23L, filed April 23, 2025.

Is This Reasonable?

 

I have long maintained that the IRS is unreasonable by repeatedly disallowing reasonable cause exception to its numerous penalties. Their standard appears to allow little to no room for real-world variables – someone got sick, someone misunderstood the requirements (wow, how could that happen?), technology broke down, and so on.

Mind you, I say this after contacting the IRS – AGAIN – about returns we filed for two clients. In each case the IRS has misplaced the returns, failing its mission, causing needless (and incorrect) notices, and embarrassing us as practitioners. One of these returns will soon celebrate its one-year anniversary. The IRS has had plenty of time to investigate and resolve the matter. I have, and I am just one guy.

However, have a practitioner send a tax return two minutes after midnight on an extended due date and the IRS will penalize his/her tax practice to near bankruptcy. It may be that there was no electricity in the office until that very moment. No matter: there is no reasonable cause for things not functioning perfectly every time every place all the time.

The hypocrisy is almost suffocating. Let’s make the relationship reciprocal – for example, let me send the IRS an invoice for wasting my time – and see how quickly the IRS recoils in terror.

Let’s talk about RSBCO’s recent shout-out to the Supreme Court.

RSBCO was a wealth management company headquartered in Louisiana. It hired someone (let’s call him Smith) with a background in accounting to spearhead its IRS information reporting.

Smith took RSBCO successfully through one filing season.

Unbeknownst to anyone, however, Smith was fighting some dark demons, and the second filing season did not go as well.

Smith unfortunately waited until the final day to electronically file approximately 20,000 information returns using the IRS FIRE system. FIRE sent an automated e-mail that certain files had errors preventing them from being processed and RSBCO should send replacement files. The e-mail went only to Smith, so no one else at RSBCO knew.

Smith – approximately four months later – was able to resume work. He had been diagnosed with clinical depression, having suicidal ideation, and struggling to focus and complete tasks at work.

COMMENT: I am thinking Reg 301.6724-1(c):

(c) Events beyond the filer's control

(1) In general. In order to establish reasonable cause under this paragraph (c)(1), the filer must satisfy paragraph (d) of this section and must show that the failure was due to events beyond the filer's control. Events which are generally considered beyond the filer's control include but are not limited to—

(iv) Certain actions of an agent (as described in paragraph (c)(5) of this section),

Smith saw the e-mails. He corrected the information returns.

QUESTION: What were the errors about? About dashes, that’s what. The IRS wanted dashes added or removed. Approximately 99% of the problem was little more than a spelling bee.

Smith had a successful third filing season.

Except for the $579,198 penalty notice the IRS sent for the information returns from season two.

COMMENT: Methinks that is a bit harsh for not winning a spelling bee.

Smith was still battling his health issues. He hid the penalty notice in his desk.

A few months later RSBCO let Smith go.

The new hire soon found the notice and tried to contact the IRS. The contact number provided was entirely automated, so the hire could never speak with a human being.

COMMENT: Been there, pal.

The IRS – thinking they had been ignored – sent a Final Notice. RSBCO requested a Due Process Hearing.

The Hearing Officer for the CDP hearing mostly waived off RSBCO’s side of the story. After a Solomonic 15-minute reflection, the Officer did offer to abate 25% of the penalty amount.

COMMENT: It’s something.

RSBCO had to decide how to proceed. They decided to pay the IRS $579 grand and pursue the refund administratively.

In December 2018 RSBCO filed a Claim for Refund.

The IRS received it. And then lost it.

Uh huh.

In August 2019 RSBCO filed a lawsuit.

In June 2020 – after irritating the court – the IRS promised RSBCO that it would play fair if they refiled the claim.

RSBCO agreed and withdrew the lawsuit.

In September it filed its Claim for Refund … again.

And the IRS lost it … again.

COMMENT: You see what is going on here, don’t you?

In May 2021 RSBCO filed a second lawsuit in district court.

In September 2022, the jury decided that RSBCO had reasonable cause for penalty abatement.

COMMENT: Will this ever end?

The IRS processed the refund … wait … no, no … that’s wrong. The IRS appealed the district court decision to the Fifth Circuit.

The Fifth Circuit found that jury instructions were flawed. The district court stated that an employee’s mental health - by itself - did not give rise to reasonable cause. The jury was not properly instructed.

QUESTION: I guess the following by the district court judge was unclear to the IRS, which DID NOT object:

Anything else? Anybody want to put your objection [to jury charges] on the record if you’d like objecting to them?”

COMMENT: I can see the confusion. Making out this question is like trying to plumb the metaphysics of James Joyce’s Ulysses. No wonder the IRS failed to object.

In October 2023 RSBCO petitioned the Supreme Court.

Which just declined the petition.

Meaning the Fifth Circuit has the final word.

The Fifth Circuit wants a new trial.

Will this nightmare ever end?

It is … unreasonable.

Our case this time was RSBCO v U.S., US Supreme Court Docket 24-561.

The Old Three And Two

 

You will recognize the issue.

During 2017 Mary deNourie worked at a retail store. She had wages of $11,516 and social security of $7,559. She and her husband did not file an income tax return because the withholding was enough to cover any tax due.

In 2021 the IRS contacted them about not filing a 2017 tax return. The IRS was preparing a substitute for return showing the wages and social security as well as partnership income of $25,065. When you throw the partnership into the mix, they now owed tax of $4,192, plus interest and penalties.

What partnership income, they exclaimed? The partnership had not paid them anything.

COMMENT: That is not the way partnerships are taxed. For example, a 10% partner will generally be taxable on 10% of the partnership’s taxable income. This amount is reported to a partner on Schedule K-1, a copy of which goes to the IRS. Whether the partner has received cash to go with that K-1 does not matter to the IRS. That is a matter for the partner to take up with the partnership.

I then see a court order in April 2023 releasing the husband from the matter.

That is unusual. What happened?

The IRS had not sent out a Notice of Deficiency – the 90-day letter – to the husband. This is a no-no. The IRS also has rules and procedures, and each spouse (on a joint return) must receive his or her own Notice of Deficiency. Mary received hers. He did not.

Now Mary was on her own.

Coincidentally, the partnership income went away.

COMMENT: It appears the husband owned the partnership.

We are back to Mary’s W-2 and social security.

Mary and the IRS worked on an agreement. There was no tax due for 2017. In fact, there was an overpayment of $284.

Mary wanted the $284.

Can’t blame her.

The IRS said no.

Mary in response refused to sign the agreement.

In March 2024 Mary filed a tax return for 2017. She wanted her refund.

What do you think: will Mary receive that refund?

Here is the relevant law:

Sec. 6511 Limitations on credit or refund

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.

Right or wrong, there is a limit on how long you can wait to file for a refund. If you file a return, for example, you have three years to amend for a refund.

There is a riff on the above rule if you file now and pay later. The Code will then permit a refund until 2 years after the tax is paid if that date is after the three-year date.

Notice what this three-and-two have in common:

          You filed a return.

If you do not file a return, the rule gets grimmer:

          You have until 2 years after the tax was paid.

If you file, you start with three and might move to two – and only if two allows for more time.

Don’t file and you have two – period. You have no choice.

Let’s see what Mary did:

·       Mary’s 2017 tax return was due April 15, 2018.

·       She did not file, so the mandatory two-year rule applies.

·       There is still hope, though. If she files within three years – by April 15, 2021 – she can flip the mandatory two back to the normal three-and-two.

o   She filed 2017 in March 2024.

Nope. Too late all around.

Mary had no tax due for 2017, but she likewise had no refund for 2017.

My thought? If you have withholding, consider filing even if there is no tax due. Why? Because withholding represents tax paid, and not filing triggers the mandatory two-year rule. By filing you move to the three-and-two rule. It may save you; it may not, but it provides more breathing room than the alternative.

Today we discussed Mary deNourie v Commissioner, U.S. Tax Court, docket 18182-22.

Filing A Zero-Income Tax Return

Here’s a question:

Would you file a tax return if you have no income – or minimal income - to report?

I would if there was a refund.

I also lean to filing if one has a history of tax filings.

The former is obvious, unless the incremental cost of filing the return is more than the refund.

The latter is because of my skepticism. I do not want a letter from the IRS stating they have not received a tax return for name-a-year. Granted, the issue should be easily resolved, but I have lost track of how many should-be’s have turned out to not-be.

Another reason is a rerun of Congress’ decision to automatically send advance payments back in 2021 – specifically, the child tax credit.       

You were ahead of the game by having filed a prior year return.

Ruben Varela filed a 1040EZ for 2017. It showed a refund of $1,373.

OK.

Ruben attached four Forms 4852 Substitute for Form W-2.

This form is used when an employer fails to send a W-2, among other situations. It happens and I see one every few years. But four …? That is odd.

The 4852’s that Ruben prepared showed zero wages.

And the $1,373 included Social Security and Medicare taxes., taxes which are not refundable.

Ruben, stop that yesterday. This is common tax protestor nonsense.

Let’s read on. There was third party reporting (think computer matching) for wages of $11,311 and cancellation of indebtedness income of $1,436.

Not surprisingly, the IRS considered it a protest filing and assessed a Section 6702(a) penalty.

§ 6702 Frivolous tax submissions.

(a)  Civil penalty for frivolous tax returns.

A person shall pay a penalty of $5,000 if-

(1)  such person files what purports to be a return of a tax imposed by this title but which-

(A)  does not contain information on which the substantial correctness of the self-assessment may be judged, or

(B)  contains information that on its face indicates that the self-assessment is substantially incorrect, and

(2)  the conduct referred to in paragraph (1) -

(A)  is based on a position which the Secretary has identified as frivolous under subsection (c) , or

(B)  reflects a desire to delay or impede the administration of Federal tax laws. 

That caught Ruben’s attention, and he disputed the penalty. On to Tax Court they went.

How can I owe a penalty if there was NO TAX, argued Ruben.

On first impression, it seems a reasonable argument.

But this is tax. Let’s look at that Code section again. 

              Such person files ….                                                      OK

              What purports to be a tax return …                                OK

      Does not contain information on

   which the substantial correctness …                             ?

 

Let’s talk about this last one. The Tax Court has a history of characterizing “zero” W-2s as both substantially incorrect and not containing sufficient information allowing one to judge the self-assessment of tax.

We have a third “OK.”

Back to Section 6702.

Is there any reference in Section 6702 to whether the return did or did not show tax due?

I am not seeing it.

The Court did not see it either.

They upheld the Section 6702 penalty.

The IRS wanted more, of course. They also wanted the Section 6673 penalty.

§ 6673 Sanctions and costs awarded by court

This penalty can be imposed when somebody clogs the Court in order to impede tax administration. The penalty can be harsh.

How harsh?

Up to $25 grand of fresh-brewed harsh.

The Court noted they had not seen Ruben Varela before nor was it aware of him previously pursuing similar arguments. They declined to impose the Section 6673 penalty, but …

We caution petitioner that a penalty may be imposed in future cases before this Court should he continue to pursue these misguided positions.”

The Court was warning him in the strongest legalese it could muster.

Our case this time was Ruben Varela v Commissioner, T.C. Memo 2024-92.

 

Not Quite The Informal Claim Doctrine

 

I am looking at a district court opinion from Illinois.

I find the discussion of the numbers a bit confusing. It happens sometimes.

But there something here we should talk about.

We have recently discussed the tax concept of a “claim.” In normal-person-speak, it means you want the government to refund your money. The classic claim is an amended income tax return, but there can be claims for other-than-income taxes. It is its own niche, as using the wrong form can result in having your claim rejected.

Let’s look at the American Guardian Holdings case.

AGH filed its 2015 tax return on September 19, 2016.

Here are the numbers on the original tax return:     

	Original
Revenues	152,092,338
Taxable income	4,880,521
Tax	1,327,806

 The accountant found an error and amended the return on June 6, 2019.

			First
	Original		Original	Amended
Revenues	152,092,338		152,092,338	154,808,792
Taxable income	4,880,521		4,880,521	11,084,397
Tax	1,327,806		1,327,806	148,243
Refund				(1,179,563)

Let me see: The 2015 return would have been extended to October 15, 2016. The amended return was prepared June 6, 2019. Yep, we are within the statute of limitations.

Problem: AGH never sent the amended return.

Answer: AGH hired a new accountant.

The new accountant filed an amended return on September 19, 2019.

COMMENT: Still a few days left on the statute.

For some reason, the accountant incorporated the first amended (even though it had not been filed) into the second amended, resulting in the following hodgepodge:

		First		Second
		Original	Amended	Original	Amended
Revenues		154,808,792	141,773,572	154,808,792	?
Taxable income		11,084,397	7,446,746	11,084,397	?
Tax		1,327,806	148,243	1,327,806	0
Refund			(1,179,563)		(148,243)
Total refund					(1,327,806)

Huh? I would find that second amended confusing. On first impression it appears that AGH is filing a claim for $148,243, but that is incorrect. AGH was stacking the second amended on top of its first. AGH is filing a claim for $1,327,806, which is the entire tax on the original return.

Not surprisingly, the IRS also responded with “huh?” It could not process the second amended return because the “Original” numbers did not match its records.

AGH responded by filing yet another amended return (third amended). Mind you, at this point it was after October 15, 2019, and the statute of limitations was in the rear view mirror.

AGH did the following:

(1)  AGH explained that the new and shiny (third) amended return incorporated the previously (non-filed) first amended return and the second (actually filed) amended return. As a consequence, the “previously-filed amended return for 2015 should be discarded.”

COMMENT: NO! 

(2)  AGH further explained that it was filing Form 1120-PC (a specialized tax form for property and casualty insurance companies) as its third amended return rather than the Form 1120 originally filed because it had received permission to change its method of accounting.

COMMENT: NO!!

I am somewhat shocked at how deep a hole AGH had dug, and more shocked that it kept digging.

Let’s go through the wreckage:

(1)  AGH filed its (second) amended return/claim within the statute of limitations.

(2)  This creates an issue if the claim is imperfect, as one would be perfecting the claim AFTER the statute expires. Fortunately, there is a way (called the informal claim doctrine) that allows one to perfect a claim after the original filing date and still retain the benefit of that original date. 

(3)  The IRS immediately seized on the “previously-filed amended return for 2015 should be discarded” statement to argue that AGH had violated the informal claim doctrine.  If the second amended return was discarded, there was no timely-filed return to which the informal claim doctrine could attach. Fortunately, the Court decided that the use of the word “discard” did not actually mean what it sounded like. AGH dodged a bullet, but it should never have fired.

(4)  That leaves the third amended return, which was filed after the statute expired. AGH of course argued informal claim, but it had committed a fatal act by changing its method of accounting. You see, the informal claim allows one to clarify, document and explain whatever issue is vague or in dispute within the claim at issue. What one is not allowed to do is to change the facts. AGH had changed the facts by changing its method of accounting, meaning its third amended return could not be linked to the second via the informal claim doctrine.

(5)  Standing on its own, the third amended of course failed as it was filed after the statute had expired.    

This case is a nightmare. I am curious whether there was a CPA or law firm involved; if so, a malpractice suit is almost a given. If the work was done in-house, then … AGH needs to tighten up its hiring standards. The case reads like there were no adults in the room.

All is not lost for AGH, however.

Remember that AGH filed its second amended return within the statute of limitations.  The matter then went off the rails and the Court booted the third amended return.

But that leaves the second amended. Can AGH resuscitate it, as technically the Court dismissed the third claim but not necessarily the second?  It would likely require additional litigation and associated legal fees, and I would expect the IRS to fight tooth and nail. AGH would have to weigh the cost-benefit.

Our case this time was American Guardian Holdings, Inc v United States of America, No. 1:2023cv 01482, Northern District of Illinois.