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Court Addresses Issue of Whether Filing Form 1040 Tolls Statute on Unfiled Form 945

(Parker Tax Publishing June 2017)

A bankruptcy court held that, because a business owner's individual income tax returns were not part of the record in the case, it could not resolve the question of whether the owner's Forms 1040 contained enough data to calculate his Form 945, Annual Return of Withheld Federal Income Tax, liability with respect to subcontractors he hired for his business. As a result, the court could not determine whether the individual's failure to file Form 945 meant that the IRS had unlimited time to assess withholding tax liability on the business owner. Quezada v. IRS, 2017 PTC 285 (W.D. Tex. Bankr. 2017).


James Quezada is a masonry contractor. His company, Quezada Masonry, was hired on a contract basis to provide materials and labor for masonry projects. Quezada typically supplied the materials and hired subcontractors to perform the labor. From 2005 to 2008, Quezada filed tax returns reporting payments made to subcontractors. He also claimed deductions for these payments on his Forms 1040 for each of the years at issue.

The IRS began examining Quezada's 2005 backup withholding liability for the subcontractors in September 2008. Three years later, it began to examine Quezada's withholding liability for 2006-2008. In December 2013, an IRS appeals officer reported his findings and recommended that approximately $600,000 be assessed, together with almost $300,000 of penalties, because Quezada did not file Forms 945, Annual Return of Withheld Federal Income Tax, to report backup withholding or pay backup withholding taxes in 2005-2008.

The IRS assessed Quezada's liability for these years in February 2014, more than three years after Quezada filed his Forms 1040. In March 2015, the IRS sent Quezada a deficiency notice stating that Quezada owed over $1.2 million, including interest and late payment penalties. Quezada filed for bankruptcy under Chapter 11 in 2016 and the IRS filed a proof of claim. Quezada filed an adversary proceeding to determine the debt's dischargeability and for declaratory relief from the taxes listed in the IRS proof of claim.


An employer is not generally required to withhold taxes on payments to independent contractors. However, if a contractor fails to provide the IRS with a taxpayer identification number (TIN), the employer must withhold 28 percent of certain taxable payments and report this backup withholding on Form 945, Annual Return of Withheld Federal Income Tax.

However, even if an employer fails to withhold the taxes, and does not file Form 945, the employer can still avoid liability as long as it can be shown that the independent contractor reported and paid taxes on the payments. The employer complies with this requirement by obtaining a Form 4669, Statement of Payments Received, from each independent contractor. By filing Form 4669, the contractor declares under penalty of perjury that he or she filed a tax return reporting the payments received from the employer. So, if a taxpayer employs independent contractors, he or she has to either:

(1) provide the contractor's TIN;

(2) file Form 945 to report the backup withholding on these payments, and pay the backup withholding; or

(3) obtain a complete Form 4669 from each independent contractor.

The IRS has three years three years from the filing of a return to assess any tax deficiency, including backup withholding. If no return is filed, then under Code Sec. 6501(c)(3), the limitations period does not apply and the IRS can assess taxes at any time.

The IRS argued that Quezada did not comply with his backup withholding obligations because he did not submit the independent contractors' TINs, did not file Forms 945, and did not obtain and submit Forms 4669. Therefore, according to the IRS, no return was ever filed to trigger the three year statute of limitations period, and Quezada's backup withholding liabilities could be assessed at any time. Quezada filed a motion for summary judgment arguing that even if he failed to file Form 945, his Form 1040 filings for the years at issue were sufficient to trigger the statute of limitations period for assessing his backup withholding liability. During the hearing on the Quezadas' motion for summary judgment, the parties agreed that fact issues prevented the bankruptcy court from ruling on all but one issue: did Quezada's failure to file Form 945 mean the IRS had unlimited time to assess withholding tax liability under the statute of limitations tolling provisions of Code Sec. 6501(c)(3).

The bankruptcy court denied Quezada's motion for summary judgment. First, it noted that no courts have ruled on whether a Form 1040 filed by a taxpayer triggers the statute of limitations period with respect to an unfiled Form 945. However, the court found precedent indicating that the limitations period is not triggered where taxpayers failed to file other types of required returns. Underlying the rationale in those decisions, the court said, was the substantial compliance standard articulated in Beard V. Comm'r, 82 T.C. 766 (1984), which provides that a document is sufficient for statute of limitations purposes if it -

(1) contains sufficient data to calculate tax liability;

(2) purports to be a return;

(3) is an honest and reasonable attempt to satisfy the requirements of the law; and

(4) is executed under penalties of perjury.

The court held that Form 945 is a return and that the question before it was whether in the information actually filed by Quezada provided enough data to calculate his Form 945 liability. In denying Quezada's motion for summary judgment, the court found that it could not determine whether Quezada's Forms 1040 provided enough data because Quezada had not attached the returns actually filed to his initial brief.

For a discussion of reporting backup withholding on Form 945, see Parker Tax ¶216,130. For a discussion of the statute of limitations for assessments, see Parker Tax ¶260,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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