A Different Type of Offset Fight – Illegal Exaction

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In Greene v. United States, the Court of Federal Claims determined that the IRS could offset a federal tax refund against a criminal fine.  Mr. Greene filed a joint return for 1990 with his then wife, Sandy.  They reported a tax liability of $8,870.  Their withholding credits exceeded that amount so they received a small refund.  Subsequently, the IRS audited their return and determined that they had forgotten to report an additional $888,497 of income.  Ms. Greene was determined to be an innocent spouse.  The IRS came back and assessed additional liabilities including the fraud penalty against Mr. Greene.

On September 1, 2005, Mr. Greene was convicted of evasion of the payment of taxes and subscribing to a false tax declaration. The district court entered a judgment against him imposing a 70 month prison sentence and a $500,000 fine.  In 2012, Mr. Greene settled a tax refund suit that was distinct from the criminal action and received a $437,423 tax refund for 1995.  The IRS offset this refund to satisfy the $500,000 fine.  He brought suit to reverse the offset and obtain his refund.  This was not a refund suit in the traditional sense but rather a suit over the correctness of the offset of the refund.  The IRS allowed the refund but then, according to Mr. Greene, made an illegal exaction.

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Mr. Greene brought suit to recover the refund amount based on the legal theory of illegal exaction. Tax professionals are accustomed to offset under IRC 6402 but the federal government has broader offset powers as well partially discussed in an earlier post.  In looking to determine whether it had jurisdiction over this matter, the Court of Federal Claims looked to the Tucker Act which is the principal statute governing its jurisdiction.  The Tucker Act waives sovereign immunity for claims against the United States if the claim is found, inter alia, in the Constitution or a federal statute.  The Tucker Act itself does not provide for remedies but provides jurisdiction.  Here, the plaintiff pointed to “illegal exaction” as the basis for the Court’s jurisdiction and for relief.  Illegal exaction “involves money that was improperly paid, exacted, or taken from the claimant in contravention of the Constitution, a statute or a regulation.”

The Court said that “the prototypical illegal exaction claim is a tax refund suit alleging that taxes have been improperly collected or withheld by the government.” However, a taxpayer may allege an illegal exaction claim not grounded in tax refund.  The Court cited to Section 6402(g) stating “[n]o action brought against the United States to recover the amount of any such reduction [of a tax refund by an offset] shall be considered to be a suit for refund of a tax.”  The reason that a suit seeking to set aside an offset is not a suit for refund is that the IRS has granted the refund and the granting of the refund created the basis for making the offset.  So, a taxpayer unhappy with the offset of a refund is not fighting with the IRS about the refund.  Rather, it is fighting with the federal government about the taking of the refund and applying it somewhere else instead of sending it to the taxpayer.  When the federal government offsets a refund and applies it to another tax year, then the refund provisions are implicated with respect to the other tax year.  If, however, it applies the refund to something other than taxes then the general offset provisions set forth in 31 USC 3720A are implicated and the individual can bring an action arguing that the provisions of that title were not met as the offset occurred.

The Court stated that to invoke its jurisdiction under the Tucker Act “a claimant must demonstrate that the statute or provision causing the exaction itself provides, either expressly or by necessary implication that the remedy for its violation entails a return of money unlawfully exacted.”   Here, it found that 31 USC 3720A “necessarily implies a monetary remedy if the Government perpetrates an illegal exaction pursuant to [its] authority [because] … absent a monetary remedy, a litigant has no recourse to cover wages unlawfully garnished or income tax refunds unlawfully offset.”  The Court pointed out that although the Flora rule requires full payment in order to sue for a tax refund claim, “a plaintiff who alleges an illegal exaction claim based on an offset need not have fully paid the tax liability for this court to have jurisdiction” citing Ibrahim v. United States, 112 Fed Cl 333, 336 (2013).

Mr. Greene argued that in making this offset the government did not follow the requirements of 31 USC 3720A because it failed to notify him of the proposed offset, failed to allow him 60 days to present evidence that his fine was not past due, it failed to properly certify the debt and it failed to make reasonable efforts to obtain payment of the debt from him. You can see from these arguments and from looking at the statute that the basis for making an illegal exaction argument does not turn on whether the underlying liability to which the payment was applied was a valid debt.  Mr. Greene did not argue that he did not owe the $500,000 fine.  Rather, he argued that the IRS did not go through the proper steps before it got the Treasury Department to make this offset, viz., it failed “to notify him of the proposed offset; to allow him sixty days to present evidence that all or part of the fine was not past due; to certify the debt; and to make a reasonable effort to obtain payment of any debt.”

The IRS filed a motion to dismiss based on lack of subject matter jurisdiction and the parties filed cross motions for summary judgment. The IRS argued that it did provide Mr. Greene with notice before the offset occurred and with notice after it occurred.  The IRS also argued that the debt was certified.  It said that it referred the matter to the Treasury Offset Program in 2006 and that it certified the debt annually each year thereafter.  The IRS next argued that the judgment in the criminal case allowed it to levy or execute on his property even if he were paying according to the schedule of payments imposed by the judgment.  Finally, the IRS argued that even if it committed a procedural foot fault, return of the proceeds was not the appropriate remedy and further that if the court awarded Mr. Greene a monetary judgment as a result of any procedural error the IRS would be required by 31 U.S.C. 3728 to offset that monetary judgment as well.

The court next provides a fairly detailed description of the DOJ system for collecting on judgments. This section is of the opinion is worth reading if you want a primer on the steps DOJ takes when entering judgments into its computer system and generating notices.  Many parallels exist between this system and the IRS computer system for assessing and recording collection action.  Although the DOJ system did not contain copies of the precise letters sent to Mr. Greene the testimony of the DOJ employees convinced the court that it entered his information correctly and appeared to have followed the correct procedures.  The court agreed with the government that the debt was past due at the time of the offset because the judgment order required immediate payment and specifically allowed the IRS/DOJ to take steps to collect it if it were not immediately paid.  With respect to the damages Mr. Greene requested, the court found that it appeared the IRS had complied with all of the requirements of the notice statute, that even if it had not complied the court had no basis for returning the proceeds or ordering a monetary judgment.

The case is instructive concerning the process of offset where the IRS is getting the benefit of offset to satisfy a judgment. The court walks through the statutory requirements and provides a map for others to follow if they feel the government has not properly performed an offset in these circumstances.  In the end, this type of case appears extremely difficult to win which is why so few of these cases make it to published opinions.

Comments

  1. Jason T. says:

    If Mr. Greene actually “received a $437,423 tax refund for 1995,” then how is it possible that “[t]he IRS offset this refund to satisfy the $500,000 fine”?

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