The Second Circuit Court of Appeals eliminated the six month “black hole” that the Tax Court believed existed for refunds of taxpayers who failed to timely file a return when it reversed that Court’s decision in the case of Borenstein v. Commissioner, Case No. 17-3900.

The details of the original case were discussed in our blog post in August 2017 when the original decision was issued (“Taxpayer’s Refund on Unfiled Return Falls Into “Black Hole” Based on Date IRS Issued Deficiency Notice”).  The Tax Court found that IRC §6512(b)(3), added by Congress in the Taxpayer Relief Act of 1997, created a six month “black hole” during which, if no return had originally been filed and the IRS issues a notice of deficiency before such a return is filed, the taxpayer would be barred from claiming a refund by filing a return following the issuance of the notice.  The problem is triggered if the taxpayer, while not filing a return, had filed for an extension of time to file such return.  The six month extension created, in the view of the Tax Court, a six month black hole for such refunds.

Note; On April 2, 2019 the Second Circuit reversed the Tax Court in this case. See Second Circuit Reverses Tax Court, Removing "Black Hole" for Claiming Refunds.

Taxpayers who fail to timely their tax returns will sometimes tell advisers that it doesn’t matter because they are sure they are overpaid.  That’s fine—except that any overpayment can be lost if the taxpayer waits too long to timely file the return.

In the case of Borenstein v. Commissioner, 149 TC No. 10, the taxpayer discovered a way to lose a refund that probably will be new to most readers.

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Filing a Tax Court petition regarding a tax assessment carries risks, some of which an adviser may not normally consider.  In the case of Estate of Billhartz v. Commissioner, No. 14-1216, 2015 TNT 143-12 the issue that arose came after the estate had entered into a settlement with the IRS.

Under IRC §6512 a taxpayer who files a petition with the Tax Court regarding a proposed tax deficiency may not later file a claim for refund—rather, all issues need to resolved in the Tax Court case.  That’s true even for issues that may come to the taxpayer’s attention following the conclusion of the case.