When a taxpayer files a federal tax return, the IRS generally has a 3 year statute of limitations period to assess additional tax beyond that reported on the return. If the tax year is audited, the auditor may ask the taxpayer to file a Form 872 that extends the statute of limitations so there is more time to complete the audit.
In a recent Tax Court case, an auditor had obtained a Form 872 from the taxpayer. However, the Form 872 was filled in with the wrong tax year. The IRS ultimately issued a notice of proposed assessment. This was done beyond the original 3 year statute of limitations period, but before the expiration date indicated in the erroneous Form 872 extension. The taxpayer claimed that the proposed assessment was barred by the statute of limitations since the Form 872 did not apply to the subject tax year.
The Tax Court ruled in favor of the government. It reviewed the facts and found that BOTH the taxpayer and the government had made a mistake – they both thought the Form 872 applied to the tax year under audit. Based on a mutual mistake theory, the Tax Court reformed the Form 872 to apply to the audit tax year.
Under the Tax Court’s theory, a different result may arise if the taxpayer had noticed the IRS’ mistake on the Form 872, but signed it anyway (and could otherwise provide this). In that circumstance there would not have been a mutual mistake – the IRS would have made a mistake but the taxpayer would have signed intending to extend the statute of limitations on the year described in the form. Perhaps there may be some case law that already supports the taxpayer or the government in that scenario – I haven’t checked.
Hartland Management Services, Inc., et al. v. Commissioner, TC Memo 2015-8, January 12, 2015
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