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Does the IRS ever fail to process tax returns?

November 26, 2016

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It seems so basic: Did you file a return or didn’t you?

Rather remarkably, however, even this seemingly straightforward question can result in litigation.

In this post, we will discuss a recent case in which one of the issues was proving that a return was filed.

The case is called McGrew v. IRS. It is from the U.S. Bankruptcy Court for the Northern District of Iowa.

One of the issues in McGrew was whether the IRS had lost a tax return that the taxpayer said was filed.

An IRS employee testified that, as far as she knew, the IRS hadn’t ever lost a return. But history does contain a particularly troubling episode where this occurred.

In the mid-1980s, overworked employees at several IRS processing centers deliberately hid or destroyed tax returns. The employees had apparently become desperate because of unreasonable demands for processing such a high volume of returns in such limited time.

This shocking discarding of returns was perhaps most prominent at the Philadelphia service center, but it also occurred elsewhere, including in Austin. The management problems that led employees to this drastic action have presumably been fixed, but the fact remains that it is not unprecedented for the IRS to fail to process a return that was properly filed.

This remains true even in an age when many taxpayers e-file their returns. Tax returns do sometimes get lost in the IRS’s vast system.

In the McGrew case, a woman had gotten behind on filing and failed to do so for many years. Eventually, facing a levy on her wages, she filed returns for all of the past years and the IRS approved an installment agreement. But her return for one of those years, 2006, was not processed by the IRS.

The financial problems that led caused the woman to get behind on her taxes eventually led her filing bankruptcy. In bankruptcy litigation, she sought to discharge her tax liability for previous years. One of the issues was whether she had filed a tax return for 2006.

The bankruptcy court found that there was sufficient evidence that she had filed a return for that year. The court reasoned that the IRS would not have approved an installment agreement in 2010 if the return for 2006 really were missing.

Tax Controversy