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E-Filing: Comments Provided to IRS Regarding Transmission Failures

As taxpayers are (or should be) aware, federal income tax returns must be timely filed to avoid potential penalties under Internal Revenue Code (Code) Section 6651. Historically, this meant mailing a tax return and, for returns filed close to the due date, ensuring that the “timely mailed, timely filed rule” applies (see here for our recent post on the “mailbox rule”). In recent years, there has been a push to electronically file tax returns with the Internal Revenue Service (IRS). However, for one reason or another, the potential exists that an e-filed return may be rejected.

Treasury Regulation § 301.7502-1(d) acknowledges that the mailbox rule applies to e-filed returns and that the conditions are met if the return is transmitted via an authorized electronic return transmitter and received by the IRS in a processable form. The Internal Revenue Manual (Section 20.1.2.1.1) further provides e-filed returns with a timely electronic postmark that are rejected by the IRS’s e-file system are considered timely if they are mailed (or re-transmitted) within 10 days after an initial notification of rejection.

For most taxpayers, an e-filed return is accepted by the IRS and processed in a timely manner. However, it appears that the IRS’s electronic filing system may reject some e-filed returns based on the actual tax reporting position that has nothing to do with whether the return is properly transmitted. For example, the IRS may reject a tax return if a taxpayer claims a dependent and a return has previously been filed by another taxpayer claiming that same dependent. If the taxpayer had timely mailed in a hard copy of the tax return claiming the dependent (regardless of whether that position was correct), there is no question that the return would be treated as a valid and timely filed return under the test set forth in Beard v. Commissioner, 82 TC 766 (1984). 

This raises the interesting question of why a return that, if filed in hard copy, would be treated as a timely and valid return while the identical return filed electronically would be rejected and potentially subject to the late-filing penalty under Code Section 6651. The American Bar Association Section of Taxation recently addressed this issue in comments to the IRS and suggested a 30-day grace period as opposed to the current 10-day period set forth in the Internal Revenue Manual.. It remains to be seen what action the IRS will take in response to these comments.

Practice Point: The timely filing of a tax return is extremely important to avoid any potential penalties. Taxpayers that e-file should ensure that they receive notification that their return has been accepted and processed. If an e-filed return is rejected, taxpayers should consider immediately re-transmitting the return or mailing a hard copy to avoid the potential for a penalty fight.

© 2020 McDermott Will & EmeryNational Law Review, Volume VII, Number 360

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About this Author

Partner

Roger J. Jones is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. Roger specializes in tax controversy and litigation matters representing taxpayers, including numerous Fortune 500 companies, in over 75 matters at all levels of the Federal court system, including the United States Tax Court, Federal District Court, the Court of Federal Claims, the United States Circuit Courts of Appeals and the United States Supreme Court, as well as before various State courts.

312-984-2731
Andrew R. Roberson tax attorney McDermott Will. Andy handles tax cases in Federal court, United States Tax Court
Partner

Andrew R. Roberson is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office.  Andy specializes in tax controversy and litigation matters, and has been involved in over 30 matters at all levels of the Federal court system, including the United States Tax Court, several US Courts of Appeal and the Supreme Court. 

Andy also represents clients, including participants in the CAP program, before the Internal Revenue Service Examination Division and Appeals Office, and has been successful in settling tax disputes through the administrative appeals and Fast Track processes.  He has extensive experience in Tax Court practice and procedure, corporate reorganizations, TEFRA, tax accounting and substance/form issues.  Andy is a frequent speaker on tax topics and has authored several articles on tax matters. 

Andy is active in the pro bono community, providing services to low-income individuals in Federal and state tax disputes on issues such as substantiation, deductions and credits, innocent spouse relief and collection matters.  He was recently named 2012 Volunteer of the Year by the Center for Economic Progress.

312-984-2732