Monday, September 24, 2012

Barred Collection on Assessment Closes Unlimited Statute of Limitations on Assessment (9/24/12)

In ILM 201238028 (6/19/12), here, the IRS held that, even if the IRS otherwise has an unlimited statute of limitations (either for a fraud return or failure to file per Section 6501(c)(1) and (3)), once the IRS assesses a tax for the year, the unlimited statute on assessment becomes moot if the IRS does not collect the assessed tax within the 10-year collection statute of limitations period in Section 6502(a), here.  Under the facts in that memo, the IRS made the assessment after making a substitute for return under Section 6020(b) and issuing a notice of deficiency.  Once the assessment was made, the 10 year limitations period under Section 6502(a)(1) commenced and expired.  The IRS's reasoning is:
The Service may execute a return for any taxpayer who fails to make a return required by any internal revenue law or regulation at the time prescribed, or who makes, willfully or otherwise, a false or fraudulent return. I.R.C. § 6020(b). The execution of a section 6020(b) return will not start the running of the period of limitations on assessment and collection without assessment. I.R.C. § 6501(b)(3) [here]. Accordingly, until the taxpayer files his own return, there will be no deadline by which the Service must assess the tax or file a suit to collect without assessment. Once the Service chooses to assess the tax, however, a 10-year period of limitations on collection of that assessment begins. I.R.C. § 6502(a)(1).
The Supreme Court considered the predecessor assessment and collection statutes, with respect to a non-filer taxpayer, in United States v. Updike, 281 U.S. 489 (1930). In Updike, the taxpayer had failed to file a required return, but an assessment was made. The United States filed suit against the transferees of the taxpayer to collect the assessment more than 6 years after the assessment had been made. To decide whether the suit was timely, the Court examined § 278 of the Revenue Act of 1917. Similar to current I.R.C. §§ 6501 and 6502, § 278 provided: (1) that "in the case of a failure to file a return a tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time" and (2) "where the assessment . . . has been made . . . within in the statutory limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court . . . but only if begun within six years after the assessment of the tax." Updike, 281 U.S. at 491-92 (emphasis added). The Court interpreted this statute to mean that once the Service assessed a liability against a taxpayer, even where the taxpayer did not file a return, the six-year statute of limitations on collection began. Id. at 495. Because in Updike more than six years had elapsed before the government filed a collection suit, that suit was untimely. Id. at 495-96. In reaching this conclusion, the Court noted that "to allow an indefinite time for proceeding to collect the tax would be out of harmony with the obvious policy of the act to promote repose by fixing a definite period after assessment within which suits and proceedings for the collection of taxes may be brought." Id. 
Similarly, in a case where the Service executes a substitute for return under I.R.C. § 6020(b), there is no deadline by which tax shown on that return must be assessed. Once an assessment is made however, the § 6502 collection statute is triggered, and the Service will have ten years within which to collect the assessed tax by administrative means or through a collection suit. Further, any payment of the assessment after the collection period expires would be a statutory overpayment under I.R.C. § 6401 [here]. Section 6401 provides that the term "overpayment" includes that part of the amount of the payment of any internal revenue tax which is assessed or collected after the expiration of the period of limitations properly applicable thereto. This principle applies to both collection by the Service and voluntary payments from the taxpayer. See Rev. Rul. 74-580, 1974-2 C.B. 400. Any such payments would have to be refunded to the taxpayer, or used to offset another outstanding tax liability under I.R.C. § 6402(a).
I don't think it is specifically addressed, but presumably the IRS will not be permitted to make a new assessment to make up for the assessment that was not collected within the statute of limitations period.  So, the effect of the original assessment and lapse of the 10 year period appears to close the unlimited statute on assessment as well.

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