Tax Blog / Tax News

Unfiled Tax Returns Are More Complex Than You Might Think

By Kelly Hanley, Esq., Chicago Tax Attorney

Tax law is replete with complexities and nuances, a reality starkly illuminated in the recent case of Cortez v. IRS. This case offers lessons for taxpayers and underscores the indispensable role of a knowledgeable Chicago Tax Attorney in navigating the tangle of tax regulations and disputes.

The Factual Matrix of the Case

Joselito E. Cortez’s situation is a cautionary tale that underscores the pitfalls of not adhering to tax deadlines. His encounter with the IRS serves as a tangible example of the complex and often unforgiving nature of tax law compliance.

Initial Oversight and Its Consequences

The predicament began with what might seem like a simple oversight: Cortez missed the April 15, 2005, deadline to file his federal income tax return for the year 2004. This failure to file is a common issue that many taxpayers face, but it can set off a chain reaction of legal and financial complications.

In Cortez’s case, this unfiled tax return was not just a minor lapse. It triggered a series of statutory actions by the IRS, fundamentally altering his tax liabilities for that year. Notably, Cortez did not file for an extension, which is a necessary step taxpayers must take if they are unable to meet the filing deadline. Extensions can provide additional time to file without incurring the immediate penalties associated with late filing.

The IRS’s Response: Substitute For Return (SFR)

When a taxpayer fails to file a return, the IRS has the authority to act under Internal Revenue Code § 6020(b), allowing it to prepare a substitute return on behalf of the taxpayer. This is exactly what happened in 2009, four years after the original filing deadline. The IRS, using the information available to it, such as reported income from W-2s or other tax documents, prepared a substitute return for Cortez.

This substitute for return (SFR) is not merely a placeholder; it results in a formal tax assessment. In Cortez’s case, this assessment amounted to $6,006. This figure was determined based on the IRS’s calculations, which may not always align with what a taxpayer would have reported. The SFR often does not take into account potential deductions or credits the taxpayer may have been eligible for, possibly resulting in a higher tax liability.

Cortez’s Belated Filing

Two years after the IRS’s SFR assessment, Cortez filed a belated Form 1040 for the 2004 tax year in 2011. This filing, occurring six years after the due date, was an attempt to regularize his tax affairs for that year. In this return, Cortez reported his income and claimed deductions and credits, which is a standard practice in filing unfiled tax returns.

However, this late filing introduced new complexities. For one, it was done after the IRS had already assessed taxes based on the SFR. Secondly, Cortez’s actual return showed a different tax liability than what the IRS had determined. This discrepancy is not uncommon in such scenarios, as the SFR prepared by the IRS may not account for all the nuances of a taxpayer’s financial situation.

The IRS’s Subsequent Actions

Reacting to Cortez’s belated filing, the IRS reassessed his tax liability. This reassessment is a routine procedure when a taxpayer submits a return that differs from the IRS’s SFR. In Cortez’s case, the reassessment resulted in additional taxes being levied.

The additional assessment stemmed from differences between the IRS’s SFR and Cortez’s belated Form 1040. Such differences could include unreported income, overlooked deductions, or incorrect tax credits.

Legal Proceedings and the Core Arguments

The legal battle in Cortez revolved around a pivotal question in tax law: what constitutes a valid tax return, particularly when filed late? This question is not merely academic; it carries significant implications for tax administration and taxpayer rights.

Cortez’s Argument: The Concept of a “Nullity”

Cortez challenged the IRS’s actions based on a nuanced interpretation of tax law. His argument was rooted in a principle sometimes applied in bankruptcy cases. Here, the definition of a “return” includes not just any document labeled as such, but one that represents an “honest and reasonable attempt” to comply with tax laws.

In Cortez’s view, his late-filed Form 1040 did not meet this standard. Despite following the standard format and reporting income and deductions, he contended that the mere fact of its late filing disqualified it as a legitimate tax return. According to this argument, a late filing could be seen as inherently lacking the requisite honesty and reasonableness, particularly when it followed an IRS assessment based on an SFR.

This line of reasoning aimed to transform the late-filed return into a legal nullity. Under this interpretation, the return would not only be invalid for tax assessment purposes, but it could also nullify the subsequent IRS actions based on that return, including assessments, collections, and penalties.

The IRS’s Counterargument: Late Filing Still Constitutes a “Return”

The IRS, however, presented a fundamentally different view. Their stance was grounded in a broader interpretation of what qualifies as a return under the tax code. The IRS argued that a late-filed return, such as the one submitted by Cortez, still constitutes a valid “return” for tax purposes. This perspective hinges on the idea that a tax return is primarily a means of reporting income, deductions, and calculating tax liability, regardless of its timeliness.

The agency’s argument was supported by the notion that the tax code is designed to collect accurate tax information and revenue, rather than to punish taxpayers for non-compliance with filing deadlines. From this viewpoint, accepting Cortez’s late-filed Form 1040 as a valid return would serve the broader purpose of ensuring accurate tax liability calculation, even if it was submitted after the statutory deadline.

The District Court’s Decision: A Matter of Tax Law Interpretation

The district court’s decision in favor of the IRS essentially validated the IRS’s broader interpretation of what constitutes a “return.” In doing so, the court acknowledged that late filings, while not ideal, can still fulfill the essential functions of a tax return — reporting income, claiming deductions, and calculating owed taxes.

This decision also implied that the standards used in bankruptcy cases for defining a “return” — particularly the “honest and reasonable attempt” criterion — might not be directly transferable to general tax law. Such a transfer could undermine the administrative functionality of the tax system, potentially leading to significant disruption in tax collection and enforcement processes.

Implications of the Ruling

The ruling in Cortez underscores the importance of timely tax filing but also recognizes the legitimacy of late submissions in accurately determining tax liabilities. For taxpayers, this ruling serves as a reminder of the potential for legal disputes over tax filings and the importance of understanding how their actions can be interpreted under tax law.

For tax professionals, particularly Chicago Tax Attorneys, this case highlights the complexities involved in tax litigation and the importance of a deep understanding of the nuances in tax law interpretations. It also underscores the role of legal counsel in advocating for taxpayers’ rights and navigating the intricacies of tax disputes.

The Beard Test and Its Relevance

The Beard test, a judicially created four-factor criterion, is a cornerstone in tax law for determining the validity of a document as a tax return. The district court’s application of this test in Cortez was instrumental in shaping the outcome of the case and offers insights into the legal interpretation of tax returns.

Analysis of the Beard Test Criteria

Purport to Be a Return:

This criterion examines whether the document in question asserts itself as a tax return. Essentially, it should be apparent that the document intends to be a return. This involves not just the title of the document but also its format and content. Cortez’s filing, on a standard Form 1040, clearly met this criterion as it presented itself in the form and substance of a typical tax return.

Executed Under Penalty of Perjury:

A valid tax return must be signed under the penalty of perjury, affirming that the information provided is true to the best of the taxpayer’s knowledge. This requirement underscores the seriousness and legal weight of the document. Cortez’s Form 1040, signed under penalty of perjury, satisfied this condition, lending it the necessary legal gravitas.

Contain Sufficient Data to Calculate Tax Liability:

For a document to be considered a return, it must provide enough data for the IRS to calculate the tax liability. This doesn’t mean the calculation has to be perfect but must include sufficient information like income, deductions, and credits. Cortez’s Form 1040 reported his income and claimed deductions, thus providing the necessary data for tax calculation.

Represent an Honest and Reasonable Attempt to Comply with Tax Law:

This is perhaps the most subjective and debated criterion. It examines the taxpayer’s intent and effort to comply with the tax laws. Despite the lateness of Cortez’s filing, the court found that his Form 1040, which followed standard reporting procedures and included relevant financial information, constituted an honest and reasonable attempt to comply with tax laws.

Implications of the Court’s Application of the Beard Test

The district court’s conclusion that Cortez’s belated Form 1040 satisfied the Beard test criteria had the following implications:

Validation of Late Filings:

The court’s decision reinforced the notion that late filings, while not ideal, could still fulfill the legal requirements of a tax return. This provides some leeway for taxpayers who miss filing deadlines but later attempt to rectify their mistake.

Importance of Intent and Accuracy:

By focusing on the intent and accuracy of the information provided in the return, the Beard test emphasizes the importance of honest and accurate tax reporting, regardless of the timing.

Legal Precedent for Taxpayers and Professionals:

This interpretation of the Beard test sets a precedent that Chicago Tax Attorneys and other tax professionals must understand and consider when advising clients on late filings and disputes with the IRS.

A Balance between Compliance and Flexibility:

The application of the Beard test illustrates the legal system’s effort to balance strict compliance with tax laws and the practical realities faced by taxpayers.

The Role of a Chicago Tax Attorney in Such Cases

Cortez is a prime example of the intricate nature of tax law and the challenges taxpayers face when dealing with the IRS. In these situations, the expertise of a Chicago Tax Attorney is invaluable. These professionals play several key roles:

1. Navigating Complex Tax Laws and Regulations

Expertise in Tax Code:

Chicago Tax Attorneys possess a deep understanding of the federal and state tax codes, which are often dense and fraught with complexities. They are equipped to navigate these intricate laws, ensuring that their clients’ actions and filings are in compliance.

Staying Updated with Changes:

Tax laws are continually evolving. A proficient tax attorney stays abreast of the latest changes and understands how these changes impact taxpayers. This knowledge is crucial in advising clients accurately.

2. Understanding and Applying Legal Precedents and Standards

Interpreting Precedents:

Cases like Cortez often hinge on legal precedents. A skilled tax attorney understands these precedents and how they apply to current cases. Their ability to interpret and leverage relevant past rulings is crucial in formulating a legal strategy.

Applying Standards like the Beard Test:

The Beard test, as seen in Cortez, is central in tax law disputes. Chicago Tax Attorneys are adept at applying such legal standards to their clients’ situations, assessing whether their clients’ past actions meet these criteria, and using this analysis in legal arguments.

3. Representing and Advocating for Taxpayers in Disputes with the IRS

Representation in Audits and Litigation:

Tax attorneys represent clients in IRS audits, negotiations, and court proceedings. They provide a buffer between the taxpayer and the IRS, often reducing the stress and uncertainty that individuals face when dealing with tax disputes.

Advocating on Behalf of Clients:

They advocate for the taxpayer’s interests, challenging IRS actions if necessary, and seeking the most favorable outcomes. This representation is critical, especially in complex cases where the taxpayer’s knowledge of tax law is limited.

4. Providing Strategic Advice on Tax Filing, Compliance, and Dispute Resolution

Guidance on Tax Filing:

Chicago tax attorneys offer strategic advice on tax filing, helping clients understand the implications of various filing options and ensuring compliance to avoid future disputes.

Advising on Compliance:

They assist clients in understanding their tax obligations and developing strategies to maintain compliance, thereby minimizing the risk of disputes with the IRS.

Dispute Resolution Tactics:

In cases of existing disputes, tax attorneys employ various tactics, from negotiation to litigation, to resolve issues in their clients’ favor. They can navigate the complexities of tax dispute resolution, from administrative appeals to litigation in tax court.

Lessons for Taxpayers

Cortez, while unique in its specifics, imparts several universal lessons for taxpayers. Understanding and internalizing these lessons can help taxpayers avoid similar pitfalls and navigate their tax obligations more effectively.

1. Timeliness of Tax Filing

Avoiding Penalties and Interest:

Filing tax returns by the due date is crucial to avoid penalties and interest, which can significantly increase the total amount owed. Late filings can escalate into larger debts to the IRS, putting taxpayers in a more challenging financial situation.

Preventing Legal Complications:

As demonstrated in the Cortez case, delays in filing can lead to complex legal disputes. Timely filing reduces the risk of such disputes and the associated stress and costs.

Mitigating the Impact of Substitute Returns:

If the IRS files an SFR due to non-filing, it may not account for deductions and credits the taxpayer is entitled to, leading to a higher tax liability. Timely filing ensures that taxpayers can claim all deductions and credits they are eligible for.

2. Understanding Tax Obligations

Comprehension of What Constitutes a Return:

Taxpayers should understand the elements that make up a valid tax return. Knowledge of criteria like those in the Beard test can help in ensuring that their returns are compliant with legal standards.

Awareness of Filing Requirements:

Taxpayers must be aware of their filing requirements, including deadlines, applicable forms, and necessary documentation. This knowledge is key to fulfilling their tax obligations accurately and completely.

Recognizing the Implications of Actions:

Understanding how actions like late filings or amendments to returns can impact tax liabilities and legal standings with the IRS is essential. Awareness of these implications can guide decision-making in tax matters.

3. Seeking Professional Advice

Navigating Complex Tax Issues:

Tax law can be intricate and overwhelming. Consulting with a Chicago Tax Attorney or a tax professional provides clarity and helps in navigating these complexities.

Tailored Advice and Representation:

Professional tax advisors can offer personalized advice tailored to an individual’s or business’s specific situation. In cases of disputes, having a professional representative can significantly improve the chances of a favorable outcome.

Preventative Measures:

A Chicago Tax Attorney can also help in taking proactive steps to avoid future issues with the IRS. This includes strategic planning, reviewing past returns for potential issues, and advising on compliance with evolving tax laws.


Cortez serves as a reminder of the intricacies of tax law. It emphasizes the need for timeliness and accuracy in tax filings and the role of skilled legal counsel in navigating disputes with the IRS. For taxpayers facing similar challenges, the expertise of a Chicago Tax Attorney can be a crucial asset in achieving a favorable outcome.

Call me today for a FREE tax attorney consultation at 312-345-5440.