"Homemade" Income Tax Forms May Constitute Valid Returns

Some taxpayers file their own "homemade" income tax forms in lieu of the official Forms 1040. Taxpayers provide varying amounts of information on their income and deductions on these unofficial forms, and may or may not attach Forms W-2. These homemade income tax forms impede the IRS's ability to process returns in an efficient and consistent manner. Further, the Service is sometimes unable to immediately detect alterations to Forms 1040, resulting in taxpayers receiving tax refunds to which they are not legally entitled. There are a variety of issues about the status of these documents as "income tax returns." The issue is whether there is a "bright-line" test that might determine whether to treat a document as a return and whether to impose the frivolous return penalty on such documents.

Analysis

A document is a valid return if (1) there is sufficient data to calculate the tax liability; (2) the document purports to be a return; (3) there is an honest and reasonable attempt to satisfy tax law requirements; and (4) a taxpayer executes the return under penalties of perjury.

A taxpayer's homemade income tax form that complies with these requirements is a valid return. Unfortunately, because of the variety of documents that taxpayers might submit, it is impractical to attempt to provide a specific bright-line test for determining when a particular homemade income tax form constitutes a valid return. However, Regs. Sec. 1.6011-1(b) provides the proper approach for processing homemade income tax forms.

Regs. Sec. 1.6011-1(b) requires the IRS to analyze a homemade income tax form to determine whether it includes gross income or deductions. If so, the Service should accept the document as a tentative return and correspond with a taxpayer for a return properly made on Form 1040. If the taxpayer subsequently perfects the homemade income tax form with a return properly made on Form 1040, the IRS should accept the Form 1040 as a return filed as of the date the homemade return was filed. If the taxpayer does not perfect the homemade income tax form within a reasonable time, the Service should assess the tax shown on the tentative return and immediately initiate audit procedures to ensure that any deficiency is assessed within the limitations period.

On the other hand, if the homemade income tax form does not include gross income or deductions but simply protests the tax laws, the IRS should consider the homemade form a nullity and advise the taxpayer that he has failed to file a return.

This is a reasonable approach toward processing homemade income tax forms. If necessary, the assistance of Area Counsel should be sought to determine whether to treat a homemade income tax form as a valid return.

Processible Returns

Under Sec. 6611(a), interest is allowed and paid on any tax overpayment at the overpayment rate established under Sec. 6621. Under Sec. 6611(b)(3), for a return filed after the last date prescribed for filing the return (with extensions), no interest is allowed or paid for any day before the date on which the return is filed.

Sec. 6611(e)(1) provides that, if any tax overpayment is refunded within 45 days after the last day prescribed for filing the return of such tax (determined without extensions), or if a return filed after such last date is refunded within 45 days after the date the return is filed, no interest shall be allowed under Sec. 6611(a) on such overpayment.

Sec. 6611(g) provides that, for Sec. 6611(b)(3) and (e) purposes, a return is not treated as filed until it is filed in a form that the IRS can process. Under the law, a return can be processed if it (1) is filed on a permitted form and (2) contains the taxpayer's name, address, identification number, the required signature and sufficient required information (whether on the return or on required attachments) to permit the mathematical verification of tax liability shown on the return.

The test for determining whether a return can be processed is stricter than the test for determining whether a document is a valid return (i.e., the substantial compliance test). Even if a homemade income tax form constitutes a valid income tax return, such return is not a return that can be processed within the meaning of Sec. 6611(g). The statute specifically provides that the return must be filed on a permitted form to be considered as one that can be processed. Congress did not contemplate a Form 1040 on which the line titles or jurat were altered as a "permitted form."

Further, the information must be sufficient to enable the Service to calculate the tax liability without undue burden. Given the IRS's automated process for calculating tax liability, requiring the Service to calculate the tax liability based on information contained on a homemade income tax form constitutes undue burden and renders the return invalid for processing for Sec. 6611(g) purposes.

Frivolous Return Penalties

Sec. 6702 imposes a $500 penalty on any individual who files what purports to be a return of tax imposed by Subtitle A of the Code, but which (1) does not contain information on which the substantial correctness of self-assessment may be judged or (2) contains information that on its face indicates that the self-assessment is substantially incorrect. For the penalty to apply, the individual's conduct must be due to a position that is frivolous or a desire (which appears on the purported return) to delay or impede the administration of Federal income tax laws. The penalty is not based on tax liability. There is no requirement of an underpayment or understatement of tax for the penalty to be imposed. Liability arises immediately with the filing of the frivolous return.

This penalty is in addition to any other penalty provided by law. Sec. 6702 applies to both original returns and claims for refund filed on amended returns.

Sec. 6702 is intended to attack a variety of tax protest activities, including (1) irregular Forms 1040 that cannot be processed because of altered or incorrect descriptions of line items or other provisions; (2) references to spurious constitutional arguments instead of required completion of a tax form; (3) forms on which there is incomplete information to calculate tax liability; (4) presentation of information that is clearly inconsistent, such as the listing of only a few dependents by a person who claims 99 exemptions; (5) "gold standard" or "war tax" deductions; and (6) deliberate use of incorrect tax tables.

To be subject to the frivolous return penalty, an individual needs to file what purports to be a tax return. However, Sec. 6702 requires only that the documents filed "purport" to be a return, not that the documents must be a valid return.

Any forms or documents that a taxpayer files in pursuit of a claim for refund should be construed as a purported return for Sec. 6702 purposes. These documents would include unauthorized tax forms. It is the conduct of filing incomplete tax forms that Sec. 6702 was determined to punish and deter; excluding such documents from the definition of purported return would be inconsistent with that goal.

Altered forms and attempts to obtain a claim for refund using those forms are clearly contemplated in the Code. The determination of whether a taxpayer's purported return is subject to the frivolous return penalty must be determined on a case-by-case basis; each case must be reviewed on its own facts. There is no automatic or bright-line test for determining if a frivolous return penalty applies.

IRS Legal Memorandum 200107035 (1/16/01)

REFLECTIONS. The fact that a W-2 is attached to a homemade income tax form is relevant. The Service noted that a W-2 should be considered evidence of a taxpayer's intent to comply with the requirement to file a return. The absence of a W-2, however, does not render an otherwise valid return a nullity.

"Zero returns." The IRS also noted that a Form 1040 completed with all zeros should be treated as a valid return.