Definitions — Bearding the validity

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In order to start the statute of limitations on a tax return—that is, the amount of time the IRS has to make an assessment against that return—you must first file a valid return. What makes a return valid? The “Beard formulation,” also known as the substantial compliance standard, contains four requirements: The return must provide sufficient data to calculate tax liability, purport to be a return, be an honest and reasonable attempt to comply with tax law, and be executed under penalty of perjury. Even if your return is not perfectly accurate or complete, as long as you meet the four requirements, the return is generally considered valid for purposes of starting the statute of limitations.

The Beard formulation arose from a 1984 tax court case (Beard) which cited Supreme Court rulings in cases such as Florsheim Brothers Drygoods Company.

Here are situations where the IRS applied the Beard formulation to determine whether a return was valid.

1.

Some tax return preparers alter tax returns after the returns are approved and signed by the taxpayer. Specifically, returns are altered by overstating income, deductions, credits, or withholding without the taxpayer’s knowledge and then submitted by the tax return preparer to the IRS.

If the tax return preparer is filing the return on paper, the alterations occur after the taxpayer has approved and signed the return. If the tax return preparer is submitting the return electronically, the alterations occur after the taxpayer has indicated approval of the return by signing a Form 8879, IRS e-file Signature Authorization.

The inflated income, deductions, credits, or withholding creates a larger than expected refund and the tax return preparer keeps the portion of the refund resulting from the inflated items. When the refund is issued, the taxpayer remains unaware of the alterations because the amount of the refund received by the taxpayer equals the amount of the refund claimed on the tax return that the taxpayer had approved for filing with the IRS.

WHAT WOULD YOU DECIDE?

Is a tax return valid when it is altered by a tax return preparer who inflates income, deductions, credits, or withholding without the taxpayer’s consent after the taxpayer has approved the document but before the preparer submits it to the IRS?

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or

THE DECISION

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2.

In the following three situations, the question is: where one type of federal tax return is required from an employer, but another type is filed, is the filed return valid?

a. An employer is required to file form 944, Employer’s Annual Federal Tax Return. Instead the employer timely files four Forms 941, Employer’s Quarterly Federal Tax Return.

WHAT WOULD YOU DECIDE?

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THE DECISION

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b. An employer is required to file Form 944, Employer’s Annual Federal Tax Return. Instead, the employer timely files a Form 941, Employer’s Quarterly Federal Tax Return, for the first and second quarters of the taxable year. No return is filed for the third or fourth quarter of the taxable year.

WHAT WOULD YOU DECIDE?

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THE DECISION

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c. An employer is required to file Form 941, Employer’s Quarterly Federal Tax Return, for all quarters of the taxable year. Instead the employer timely files a Form 944, Employer’s Annual Federal Tax Return.

WHAT WOULD YOU DECIDE?

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THE DECISION

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3.

A taxpayer files Form 1040, U.S. Individual Income Tax Return, with the IRS. The IRS mails Form 1040 back to the taxpayer because the taxpayer claimed itemized deductions, but failed to attach Schedule A to the return. Four years later, the taxpayer resubmits the Form 1040, along with the completed Schedule A.

WHAT WOULD YOU DECIDE?

Does an otherwise complete individual income tax return filed without a required form or schedule constitute a valid return for purposes of the statute of limitations on assessment under § 6501 of the internal revenue code?

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THE DECISION

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***

Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided to read the entire case.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

***

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Sorry, wrong answer :(
Right answer!

No, the return is not valid.

In cases in which the taxpayer is unaware of a tax return preparer’s fraudulent alteration of items of income, deductions, credits, or withholding after the taxpayer signed the tax return (or the Form 8879), it cannot be said that the taxpayer executed the document under penalties of perjury.

In fact, the document submitted to the IRS by the tax return preparer is not the document signed and approved by the taxpayer or authorized to be filed electronically with the IRS. The document approved by the taxpayer is not sent to the IRS.

Under these facts, the return altered by a tax return preparer does not meet the requirements set forth in Beard to constitute a valid tax return.

Right answer!
Sorry, wrong answer :(

Yes, the return is valid.

Assuming the Forms 941 purport to be returns, are an honest and reasonable attempt to satisfy the filing requirements, are signed under penalty of perjury, and can be used to determine the employer’s annual FICA and income tax withholding liability, the Forms 941 meet the Beard formulation and should be treated as valid returns for purposes of starting the period of limitations on assessment.

Because the Forms 941 were filed before April 15 of the succeeding year, the deemed filing date is April 15 of the succeeding calendar year (internal revenue code section 6501(b)(2)).

Sorry, wrong answer :(
Right answer!

No, though an argument could be made that they are.

An argument can be made that the Forms 941 for the first and second quarters of the taxable year constitute valid returns under the Beard formulation since they purport to be returns and are signed under penalty of perjury.

However, given that the employer’s FICA and income tax withholding liability for the third and fourth quarters will not necessarily be equal to that reported for the first two quarters, the Forms 941 arguably are not sufficient for purposes of determining the annual FICA and income tax withholding liability and may not be honest and reasonable attempts to satisfy the tax law.

There are factual circumstances, however, in which the filing of two Forms 941 could meet the necessary criteria for an annual employment tax return, such as if the employer’s business is seasonal.

The amounts reflected on the Forms 941 must be assessed within three years of April 15 of the succeeding calendar year.

Right answer!
Sorry, wrong answer :(

Yes, the return is valid.

Assuming the Form 944 purports to be a return, is an honest and reasonable attempt to satisfy the filing requirements, can be used to determine the employer’s annual FICA and income tax withholding liability, and is signed under penalty of perjury, the Form 944 meets the Beard formulation and should be treated as a valid return for purposes of the period of limitations on assessment.

Because the Form 944 was timely filed, the deemed filing date is April 15 of the succeeding calendar year.).

Right answer!
Sorry, wrong answer :(

Yes, the return is valid.

The courts have established no “bright line” test to determine whether a Form 1040 which lacks a required form or schedule is nonetheless a valid return. Rather, courts typically apply the substantial compliance standard to the specific facts of each case.

In the case of an otherwise valid Form 1040 that lacks a required form or schedule, three of the four substantial compliance factors are clearly met: the document purports to be a return, is signed, and evinces an honest and reasonable attempt to satisfy the requirements of the law.

We conclude that the fourth substantial compliance factor is also met: the document provides sufficient data to allow the IRS to calculate a tax liability.

While a return may lack supporting schedules for particular items of gross income, deductions, and credits, it will generally provide sufficient data to calculate a tax liability. The fact that the tax liability computed on the original return is later determined to be incorrect does not necessarily cause the return to fail the substantial compliance standard.

Accordingly, we conclude that under the substantial compliance standard, an otherwise complete return which lacks a required form or schedule is sufficient to start the statute of limitations on assessment.

The facts indicate the taxpayer filed a signed and otherwise complete Form 1040 but failed to attach Schedule A. Based on these facts, we conclude that the Form 1040 is a valid return for statute of limitations purposes.

The Form 1040 purports to be a return, is signed under penalties of perjury, evinces on its face an honest and reasonable attempt to satisfy the requirements of the law, and contains enough data to allow the IRS to compute a tax liability.

Accordingly, the statute of limitations for assessment would start to run from the date the Form 1040 was filed.

Our conclusion on this issue is not limited to returns missing Schedule A. A return missing any of the commonly used forms (e.g., Schedules A, B, C, D, or E) is a valid return despite the missing schedule, provided it meets the substantial compliance standard.

At the time the Form 1040 in this scenario was received, it was not the practice of the IRS to utilize the “mathematical or clerical error” procedures contained in § 6213(b)(1) of the code to adjust returns with missing forms or schedules. Rather, the IRS mailed the entire Form 1040 back to the taxpayer.

Because we conclude the Form 1040 in this scenario is a valid return, despite the missing schedule, we recommend the return not be mailed back to the taxpayer. Instead, we suggest the IRS retain the return and correspond with the taxpayer for the missing schedule.

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