Uncle Bill has gotten somewhat of a large bee in his bonnet (a murder hornet of sorts, if you want to know the truth), and he has asked you to teach him everything that you know about civil tax procedure. You note that you are far too busy with your burgeoning practice, but you are intrigued by the Ol’ Codger’s desire to learn the ins and outs of the process through which the IRS collects revenue. Like Madison, Jay, and Hamilton writing under the name Publius, you adopt a somewhat professorial tilt (tweed jacket, Peterson pipe, and a penchant to say “yessss, indeed”), and you take on the nom-de-plume Tullius after your favorite Roman statesman and one of your favorite bands. Hey Aqualung!
(What this has to do with civil tax procedure is anyone’s guess, but it is 1:26 in the morning, and I’m punchy.)
(Subtitle) F is for Fun
As we embark on our journey through Subtitle F (“Procedure and Administration”), we will look at the pertinent sections of the Code and then break them down into smaller pieces. The first section in Subtitle F of the Code is IRC § 6001, which states
Every person liable for any tax imposed by this title, or for the collection thereof, shall keep such records, render such statements, make such returns, and comply with such rules and regulations as the Secretary may from time to time prescribe.
Whenever in the judgment of the Secretary it is necessary, he may require any person, by notice served upon such person or by regulations, to make such returns, render such statements, or keep such records, as the Secretary deems sufficient to show whether or not such person is liable for tax under this title.
The only records which an employer shall be required to keep under this section in connection with charged tips shall be charge receipts, records necessary to comply with IRC § 6053(c), and copies of statements furnished by employees under IRC § 6053(a).
There is a fair bit to unpack from this section, and it is rather more diverse than first may meet the eye.
Person Liable for Tax
First, what does it mean to be a person liable for tax imposed by Title 26 or for the collection thereof? The U.S. income tax system imposes a tax based on income on individuals, corporations, estates, and trusts.[1] Thus, if you meet certain monetary thresholds (which are outside the purview of this article), you will be a person liable for tax imposed by Title 26 (the Income Tax Code). Further it’s important to note that a “person” for tax purposes is much broader than an individual, and includes estates, trusts, and business entities…and individuals.
IRC § 7701(a)(1) defines a person (for purposes of the Code) as including individuals, trusts, estates, partnerships, associations, companies, or corporations. In turn IRC § 6012 lists nine categories of persons required to file income tax returns. There are four major categories of “persons.” The first category is individuals having gross income in excess of the exemption amount. The second category is every corporation subject to the income tax. The third and fourth categories are every estate and trust that has taxable income for the year or that has $600 or more of gross income for the year regardless of the amount of its taxable income.
As one commentator notes, “in classic Code fashion” the clarity of the section “fades into a smog of definitions…exceptions, and exceptions to exceptions.” When in doubt, follow the instructions on Form 1040, which does an admirable job of sifting through the utter quagmire of IRC § 6012.
Fiduciary and Receiver Returns
If an individual is deceased, the return of such individual required under IRC § 6012(a) shall be made by his executor, administrator, or other person charged with the property of such decedent.[2] Likewise, if a taxpayer is unable to make a return, the return must be prepared by a duly authorized agent, his committee, guardian, fiduciary or other person charged with the care of the person or property of such individual (but not a receiver of only a part of the person’s property).[3]
A receiver, bankruptcy trustee, or assignee has possession or holds title to all or substantially all the property or business of a corporation, that person will make the income tax return for such corporation in the same manner and form as corporations are required to make such returns.[4]
Returns of an estate or trust are made by the fiduciary.[5] In the case of more than one fiduciary, a return made by one joint fiduciary is sufficient.[6] Such return must contain a statement that the fiduciary has sufficient knowledge of the affairs of the person for whom the return is made to enable him to make the return, and that the return is, to the best of his knowledge and belief, true and correct.[7]
Keeping Adequate Records
So now you’re liable for tax…what do you do. Well, you must keep adequate records, file income tax returns, generally grovel to the Secretary of the Treasury, which for all intents and purposes of these articles is the IRS.[8] Not only are you under the obligation to file your income tax returns, but you are also required (through notice served by the IRS or by the Treasury Regulations) to prove that you are or are not liable for tax under the Code.
The final sentence is a bit of an outlier and concerns an employers’ requirement to keep adequate records necessary to fulfill the W-2 reporting requirements set forth in IRC § 6053.
Form 1040A
An individual who does not itemize his deductions, whose gross income is less than $10,000 and includes no income other than remuneration for services performed by him as an employee, dividends or interest, and whose gross income other than wages,[9] does not exceed $100, may elect not be required show the income on or file a Form 1040.[10] However, such election must be made on a Form 1040A. If the election is made, any tax will be computed by the IRS.
Self-Employment Returns
If an individual (other than a nonresident alien) has self-employment income during the year of more than $400, he or she must make a return with respect to the self-employment tax imposed by chapter 2 of the Code.[11] The taxes computed for a husband and wife is not computed on the income, but on the sum of the taxes computed by a formula that is outside of the purview of this article. In full disclosure, I simply didn’t want to look up Chapter 2 of the Code. I actually have a life outside Briefly Taxing.[12]
Substitute for Returns
If a taxpayer fails to make a return required by the Code and Treasury Regulations but discloses all information necessary for the preparation of such return, the IRS may prepare and execute such return.[13] More commonly, however, if a taxpayer fails to make a required return, or makes a false or fraudulent return, the IRS may prepare a “substitute for return” based on its own knowledge and from information that it can obtain through testimony or otherwise.[14]
Period of Retention of Records
So, you may ask yourself, how long must you retain records for the IRS to consider that you have maintained adequate records. The Treasury Regulations are not terribly helpful, but they do give us some guidance.
The books or records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained so long as the contents thereof may become material in the administration of any internal revenue law.[15]
This might seem, upon first blush, to be about as helpful as waving goodbye to Stevie Wonder. In practice such records need only be kept for three years after a return is filed, which is the time in which the IRS can assess tax on such returns. An argument could be made pursuant to IRS Policy Statement 5-133,[16] which discusses delinquent returns in the enforcement of filing requirements that the outside range to keep records would be six years (absent some extenuating circumstances), which is generally how far back you need to go if you failed to file returns or how far back the IRS would go if you filed incorrect returns. There are a number of exceptions that extend the statute of limitations on assessment, and consequently the record retention time beyond the three-year period, which we will discuss in later articles.
Takeaway
It is incumbent upon taxpayers to maintain adequate records. In some cases, this may mean keeping a contemporaneous diary (for purposes of IRC § 162 deductions, for example), or it may mean keeping your W-2s in a shoebox for three years after filing that year’s return. Whatever your method of maintenance, numerous Tax Court petitioners have fallen short, simply because they failed to maintain adequate records.
Footnotes:
Don’t make this mistake.
You’ve been warned.
[1] See IRC § 1; IRC § 11.
[2] IRC § 6012(b)(1).
[3] IRC § 6012(b)(2).
[4] IRC § 6012(b)(3).
[5] Id.
[6] IRC § 6012(b)(4).
[7] Id.
[8] See IRC § 6011 (general requirements of returns).
[9] As defined in IRC § 3401(a).
[10] IRC § 6014(a).
[11] IRC § 6017.
[12] That last statement was a lie. Big, boldfaced lie.
[13] IRC § 6020(a).
[14] IRC § 6020(b)(1).
[15] Treas. Reg. § 1.6001-1(e).
[16] Contained in IRM 1.2.14.1.18.
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