By: Matthew Thom, Volume 105 Staff Member
Most Americans file their taxes at the last minute. This year, that late filing is especially understandable: the COVID-19 pandemic produced a great deal of economic uncertainty for many Americans. In the aftermath of a financially complicated year, filing taxes online or with the help of a preparer is an attractive option, one that 90% of filers already choose. But what does it mean to “file” a federal tax return? The answer is surprisingly complex, and as a result of Fowler v. Commissioner, currently uncertain. But it is an important question—filing a return starts the statute of limitations on when the IRS can assess additional tax, and late filing can trigger hefty late filing and payment fees if a return is rejected.
I. SEPARATE MAILING AND E-FILING STANDARDS
Typically, a return sent to the IRS via physical mail is deemed filed upon delivery, regardless of if the IRS accepts and processes it. If the taxpayer e-files, the process does not conclude after the taxpayer hits “send.” When a taxpayer e-files their return, it goes through another step: the IRS’s Modernized E-File (MeF) Program. This computer program processes the return’s data and checks for “Business Rule” errors, rejecting returns that do not comply.
These Business Rule errors largely concern identity theft protections. For instance, an e-filed return may be rejected if another return used the filer’s social security number. If rejected, the system must send information back within 24 hours notifying the transmitter of the return’s rejection and the reason for the rejection. If the taxpayer notices, they have a five-day grace period to respond, during which they can fix potential typos or refile by physical mail. If the taxpayer doesn’t notice the rejection until after that five day period and the filing deadline passes, the results usually aren’t catastrophic. Because most taxpayers are due a refund, in most cases no late filing penalties are assessed, and the taxpayer can file and recover their return.
II. THE COST TO THOSE WHO OWE
However, if the taxpayer owes money and misses this deadline, they’ll likely have late filing and late payment penalties automatically asserted against them, because the IRS takes the position that returns rejected through MeF were never filed to begin with. These penalties can add up quickly. Why does the IRS do this? Identity theft is a huge problem for the IRS, and this arguably does protect taxpayers. If all the submitted information was correct, it can tip the taxpayer off if someone is using their social security number. It also gives filers the ability to correct clerical errors without being audited. If filers notice before the deadline, this system can be beneficial for both the taxpayer and the IRS. The taxpayer isn’t subject to an audit, and the IRS, an already severely underfunded agency, doesn’t need to divert resources to determining the difference between a typo and identity theft.
But many lower-income filers who owe may only discover that their return was rejected days or weeks later, if at all. For those who file through VITA, incorrect information, the very reason the MeF rejected the return, may prevent the organization from notifying the filer of the rejection. Filers who don’t have home internet access might not discover an email from H&R Block notifying them of the rejection for days. And for taxpayers who owe, automatically assessed penalties can impose a huge burden. A taxpayer whose income was higher this year due to an early draw on their retirement savings or who has the EITC or Child Dependent Tax Credit disallowed may find themselves quickly facing thousands of dollars’ worth of additional penalties.
III. FOWLER V. COMMISSIONER AND ITS APPLICATION TO LATE FILING/PAYMENT PENALTIES
A. Fowler v. Commissioner and the Beard Test
Enter Fowler v. Commissioner. The defendant in Fowler was a taxpayer whose identity had previously been stolen, and whose return preparer had not included a specialized PIN number that the IRS issues to prevent identity theft. The MeF system rejected the taxpayer’s return for failing to use an IP PIN, an identity theft prevention strategy utilized by the IRS. After additional attempts, the IRS finally accepted a copy of the taxpayer’s return. When the IRS tried to audit the taxpayer years later, calculation of the statute of limitations for when the IRS could initiate an audit (ASED) came down to a game of inches: if the taxpayer’s return was filed when initially e-filed, then the ASED would have run, and the IRS would not have been able to collect additional taxes. And that’s exactly what the Tax Court ruled—the rejected return was considered validly filed when received by the MeF program, analogizing the data hitting the computer system to physical delivery. It was this act of delivery that that addressed proper filing. The Court instead held that MeF program rejected the return on sufficiency grounds.
Sufficiency of a federal tax return is instead generally discussed in terms of the Beard test. The Beard test holds that a timely filed return is valid when the document (1) purports to be a return; (2) is executed under penalty of perjury; (3) contains sufficient data to allow tax calculation; and (4) is an honest and reasonable attempt to satisfy the requirements of the tax law. It’s difficult to overstate just how low of a bar the Beard test gives taxpayers. Filing a valid tax form, even if it wasn’t the correct one, can pass muster, so long as the information contained on the form was sufficient to allow the IRS to calculate the tax. The third prong, requiring sufficient data to allow tax calculation, has been interpreted as requiring that the filer provide income, deductions, and credits, and a calculation of the tax, regardless of whether it’s correct. The fourth prong of the Beard test, that the taxpayer makes an honest and reasonable attempt to satisfy the requirements of tax law, does not provide a mens rea requirement. All that is required is for the return to “appear reasonable on its face.” Even if every number on the return is fraudulent, the return is still a return.
Most relevant to Fowler was the second prong of the Beard test, the requirement that a return be executed under penalty of perjury. IRC 6061(b)(1) grants the Treasury Secretary the ability to prescribe rules defining the signature mechanism returns. The majority of the Fowler court’s validity analysis focused on this question. The Tax Court held that failing to provide an IP PIN when on an e-file document did not cause a return to fail the Beard test. However, the opinion indicated that this was largely because the IRS had failed to issue any regulations on the subject, and that arguing for the necessity of an IP PIN conflicted with the 1040 instructions.
B. Fowler’s Applicability to I.R.C. § 6651 Late Filing and Payment Fees
While Fowler concerned the proper filing date for a statute of limitations calculation, there doesn’t appear to be a good reason that the holding would not apply to assessment of fees. Though the code never explicitly defines the term “file,” if a term appears throughout a statutory text, “it is generally read the same way each time it appears.” In discussions of timely filing, the code is clear that the “return” to be “filed” is defined consistently throughout Title 26. Any other definition would be unnecessarily cumbersome. Even then, the argument for applying the Fowler standard to these fees is stronger than the ASED application in Fowler—as Bryan Camp points out in his criticism of the Fowler decision, tax limitations statutes are supposed to be construed in favor of the government. But § 6651 doesn’t apply to limitations, only assessment of fees. On a normative level, Fowler addressed an argument that allowed a taxpayer to avoid paying taxes the IRS thought were owed. Applying the standard to § 6651 penalties merely allows taxpayers who missed a confirmation email to be free of a penalty.
The bigger question is what reach the case has beyond the Tax Court and tax years prior to 2020. So far, the IRS has not issued a non-acquiescence in the case, meaning they do not intend to challenge the ruling, and the Tax Court’s rulings are binding on lower courts. But if a Fowler-esque case was appealed, appellate courts may not be as sympathetic as the Tax Court was in Fowler. Of the two district court cases that addressed this question before Fowler, both were decided in favor of the IRS. And for the practical reasons discussed above, appellate courts may be willing to read requirements into the Beard test that assist the IRS. Furthermore, read narrowly, Beard may indicate that the IRS can simply update the Form 1040 instructions to evade a similar outcome in future cases—something the Service did do for 2020.
The ruling in Fowler should apply to § 6651(a) fees imposed against taxpayers who have their returns rejected by the MeF program. While there may be concerns that such a holding would impose additional administrative burdens on the IRS, it would be better for the IRS to issue new rules defining when a return is filed in the C.F.R., or even in the filing instructions. Such an approach could focus on a way to accomplish the same goal without burdening low-income taxpayers who miss the grace period, perhaps by giving the taxpayer an option to cure the error, and then processing the return at the end of the grace period.
 Ben Casselman, Everyone Files Their Taxes at the Last Minute, FiveThirtyEight (April 15, 2016, 6:00 AM), https://fivethirtyeight.com/features/everyone-files-their-taxes-at-the-last-minute/ [https://perma.cc/FE9Z-JB6F].
 Six Reasons 90 Percent of the People Will E-File Their Tax Returns, IRS, https://www.irs.gov/pub/irs-utl/oc-e-file.pdf [https://perma.cc/P9SU-KRGE] (last visited Mar. 5, 2021).
 See Fowler v. Comm’r, 155 T.C. No. 7 (2020).
 I.R.C. § 6651(a)(1)–(2).
 See, e.g., I.R.C. § 7502 (describing one such exception, the timely mailed, timely filing rule).
 IRM 188.8.131.52.4(1).
 See What are Modernized Electronic Filing (MEF) Reject Codes?, TaxSlayer, (Jan. 1, 2020), https://support.taxslayer.com/hc/en-us/articles/360015710932-What-are-Modernized-Electronic-Filing-MEF-Reject-Codes- [https://perma.cc/284V-5KGH].
 IRM 184.108.40.206(3).
 IRM 220.127.116.11.6.
 I.R.C. § 6651(a)(1)–(2); IRM 18.104.22.168.6.
 See I.R.C. § 6511.
 See I.R.C. § 6651(a)(1)–(2).
 Treasury Inspector Gen. for Tax Admin., Partnership with State and Industry Leaders Is a Key Focus in Further Reducing Tax-related Identity Theft (Dec. 27, 2018), https://www.treasury.gov/tigta/auditreports/2019reports/201940012fr.pdf [https://perma.cc/HPC8-GAWX].
 Paul Kiel & Jesse Eisinger, How the IRS Was Gutted, ProPublica (Dec. 11, 2018, 5:00 AM), https://www.propublica.org/article/how-the-irs-was-gutted [https://perma.cc/8NVR-P9TV].
 I.R.C. § 72(t).
 IRS Efforts to Improve the EITC Improper Payment Rate Harm Taxpayers While Overlooking the Roles of Taxpayer Education and Paid Tax Preparers, Taxpayer Advoc. Serv.: NTAblog (Mar. 27, 2019), https://www.taxpayeradvocate.irs.gov/news/ntablog-irs-efforts-to-improve-the-eitc-improper-payment-rate-harm-taxpayers-while-overlooking-the-roles-of-taxpayer-education-and-paid-tax-preparers/ [https://perma.cc/V5E6-NYTL].
 Fowler v. Comm’r, 155 T.C. No. 7 (2020).
 See Fowler, 155 T.C. at *1, *1 n.4.
 Id. at *1.
 Id. at *2.
 Id. at *6.
 See id. at *5.
 Beard v. Comm’r, 82 TC 766, 777–78 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986).
 See Germantown Trust Co. v. Comm’r, 309 U.S. 304, 308 (1940).
 See Florsheim Bros. Dry Goods v. United States, 280 U.S. 453 (1930); Durovic v. Comm’r, 54 T.C. 1364, 1387–88 (1970).
 See Fowler, 155 T.C. at *3.
 Badaracco v. Comm’r, 464 U.S. 386, 396–97 (1984).
 Fowler, 155 T.C. at *4–5.
 See Ratzlaf v. United States, 510 U.S. 135, 143 (1994).
 See I.R.C. § 6501(a).
 See Bryan Camp, Lesson from the Tax Court: Rejected e-Filed Return Starts the SOL on Assessment, TaxProf Blog (Sept. 14, 2020), https://taxprof.typepad.com/taxprof_blog/2020/09/lesson-from-the-tax-court-rejected-e-filed-return-starts-the-sol-on-assessment-.html [https://perma.cc/AAJ4-SML5].
 Fowler, 155 T.C. at *7.
 IRM 22.214.171.124(2)(c).
 See Haynes v. United States, 2017 WL 2895438 (W.D. Tex. June 15, 2017), vacated, 760 F. App’x 324 (2019); Spottiswood v. United States, 2018 WL 1933521 (N.D. Cal. Apr. 24, 2018).
 See 1040 and 1040-SR Instructions: Tax Year 2020, IRS, 63, https://www.irs.gov/pub/irs-pdf/i1040gi.pdf [https://perma.cc/VAW9-BDGW] (last visited Mar. 26, 2021) (adding several signature requirements).