Category: Tax Returns, Examinations & IRS Procedure Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Individual taxpayer, TP, is a U.S. citizen living abroad. He filed returns for the tax years 1986 through 1991 only after the IRS seized some of his assets in connection with failure to file. TP elected the foreign earned income credit on Form 2555 which was filed with the delinquent returns. Based on the availability of Section 911, TP was due a refund with respect to the seized assets. Some time months after the returns were filed, the IRS refused to provide a refund based on the theory that Section 911 is unavailable because the election was made late. Regulation Section 1.911-7(a)(2)(i)(D)(2) allows a valid Section 911 election via a late-filed return if the taxpayer makes the election prior to IRS discovery of the failure to elect. In that case the taxpayer must type or legibly print a legend at the top of the first page of the Form 1040: "Filed Pursuant to Section 1.911-7(a)(2)(i)(D)." TP did not include the appropriate legend at the top of page 1 of Form 1040. The IRS argues that the discovery that the taxpayer had not filed any returns at all for the years in question constitutes discovery that the elections were not filed in a timely manner. The IRS further argues that failure to include the necessary legend at the top of the returns further dooms the election. Despite my earlier comments, I think the IRS has a very strong case, despite how repugnant it might be to actually take the position in the first instance. First, Section 911(d)(9) delegates authority to the Treasury to issue appropriate regulations. In essence, these regulations are legislative regulations and thus virtually have the force and effect of statutory law. Second, the portion of the regulation in question, Section 1.911-7(a)(2)(i)(D)(2), is clearly a relief provision whereby the IRS allows taxpayers (out of the "goodness of their hearts") to elect under Section 911 when they otherwise would not have been able to do so. Courts historically force taxpayers to strictly comply with the terms of relief-type rules under the theory the taxpayer is already getting a benefit he otherwise would not have been entitled to; accordingly, the taxpayer ought to have to play strictly by whatever rules as are laid down by the benefactor of that relief. All this does not bode well for the taxpayer in this case. It seems to me the fact the IRS discovered that TP did not file a return at all is by definition a discovery that he did not file Form 2555 on a timely basis. It was only after the IRS discovered that TP did not file anything that Form 2555 was filed. In addition, the required legend does not appear on TP's return. This seems to me to be just another nail in the coffin, so to speak. Since the regulations in question were issued in June of 1993, there are no reported cases interpreting these provisions. At this point, TP can pursue the refund suit and/or apply for a private ruling under Section 9100 to allow the election. There is a significant filing fee as well as the professional fees associated with preparing the ruling request. I would look to the tax attorney involved to advise the taxpayer how to proceed. Also, it may well be fruitful to look at existing private rulings to determine the degree of leniency or harshness with which taxpayers have been treated in the past on this issue. Please contact me if you wish to have further assistance either in researching existing rulings or preparing a ruling request. |
