Better late than never.

• Author: McBride, Gary
• Position: TaxFiling - Omohundro v. U.S.

Imagine it's September and a CPA is hired by an attorney to prepare delinquent 1999, 2000 and 2001 federal income tax returns for Del, a California resident. The CPA determines that Del's wage withholding exceeded his tax liability by $30,000 in 1999 and $15,000 in 2000. But in 2001, Del owes $50,000--not counting interest and penalties.

For the 1999 and 2000 tax years, Del filed extensions, stretching the respective due dates to Oct. 17, 2000 and Oct. 15, 2001. The CPA prepares the returns and asks the IRS to apply the $45,000 refunds for 1999 and 2000 as a partial offset to the 2001 tax liability.

All three delinquent returns are mailed to the IRS and postmarked Oct. 14, 2003. The IRS receives them four days later.

The CPA then learns that Del has retained an attorney after receiving a notice from the IRS stating that it had no record of receiving a return for 1999 and asking whether the taxpayer filed a return for that year. Del also was motivated to file by the recent IRS pledge to increase enforcement efforts against high-income nonfilers. [See IRS Fact Sheet 2002-12 (9/16/2002)]. However, Del is not under IRS examination or investigation when the returns are filed.

Are Del's refund claims timely? Yes, thanks to Omohundro v. U.S., 300 F.3d 1065 (Ninth Circuit 8/19/2002).

YOU'VE GOT MORE TIME

The court's decision to allow bad taxpayers--also known as nonfilers--as much as three years and six months (instead of two years) to get their money back on late-filed returns represents a significant pro-taxpayer change.

The decision overturned Miller v. U.S., 38 F.3d 473 (Ninth Circuit 1994), which said that in absence of a timely return, a taxpayer must file a refund claim within two years of the date of payment of the tax. [IRC Sec. 6511(a)].

Omohundro rejected Miller primarily because it ignored IRS Rev. Rul. 76-511, in which the IRS said that under IRC Sec. 6511(a), a refund claim is timely if it is filed within three years from the filing date, regardless of when the return is filed.

With a delinquent original return requesting a refund, the return is also the refund claim (per Treasury Reg. Sec. 301.6402-3(a)(5)), so the refund claim is treated as filed on the same day the return is filed--clearly within the three-year requirement.

This does not mean that late filers have an indefinite time to file a refund claim. A refund claim that is "timely" under Sec. 6511(a) may nonetheless be beyond the date necessary to recover any of the prior tax...