IRS Whiff on Timeliness of Refund Claim Prevents Payment of Refund If Taxpayer Fails to File Suit Within Two Years

What happens if a taxpayer timely files a refund claim, IRS denies the claim because it mistakenly believes that the claim is untimely and the taxpayer fails to files a refund suit within two years? To top it off, IRS, outside the two-year window for filing suit, realizes that it made an initial mistake in rejecting the claim on SOL grounds?

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A recent email released as Chief Counsel Advice describes this scenario. As the email notes, that the IRS later acknowledges the claim as timely does not grant the IRS the power to reconsider its earlier denial if the two year period for filing suit in federal court has passed. 

A quick statutory background on refunds. As to filing a suit, Section 7422 authorizes a suit for refund for taxpayers who believe they have overpaid taxes (or are entitled to an excess of refundable credits). Section 7422 authorizes such a suit only once the taxpayer has submitted an administrative claim for refund with the Service. Section 6532 prevents suits 1) until at least six months have passed after filing the claim (unless there is an earlier denial) or 2)  “after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.”

The email/advice does not provide the underlying facts but as many readers (and my suffering procedure students learn) is that the 6511(a) and 6511(b) SOL refund rules and limitations on amount can be tough.  The email flags that the timeliness of the claim issue in question relates to Section 7503, which provides rules for when the last day for performing an act falls on a weekend or holiday.  The advice acknowledges that the  refund claim was in fact timely when taking into account Section 7503.

As the advice notes, if a taxpayer has not in fact filed suit, under Section 6514(a)(2) a refund issued after the two-year period in 6532 is considered erroneous. As such, the taxpayer is out of luck unless there was some procedural defect with the IRS’s denial of the refund, such as a failure to be sent to the proper address or a failure to send by certified or registered email. 

What would happen if the IRS had issued the refund after the two-year period had lapsed?  Then the payment would be an erroneous refund, allowing the IRS to recover under erroneous refund procedures, leading to yet another complex set of rules that delight tax professors and annoy students and taxpayers alike.

The situation highlights the at times unfairness of the SOL rules. Whether the time period for an action is jurisdictional or generally subject to equitable exceptions is a topic we have discussed frequently. Bryan Camp has thoroughly discussed these issues in a recent Tax Lawyer article where he explores why he believes the refund suit rules in Section 7422 and Section 6532 are not jurisdictional.  To that end see also a PT post from Carl Smith discussing a district court case from the ED of Washington where the court equitably tolled the 6532(a) filing deadline, citing the Volpicelli case from the 9th Cir. holding that the 6532(c) wrongful levy suit filing deadline is not jurisdictional and is subject to equitable tolling. The brief CCA does not go down this rabbit hole, but I note that IRS does not accept Volpicelli, and this topic is one courts will continue to address.

Unsigned and Electronically Signed Refund Claims

Last year I blogged on the case of Gregory v. United States, 149 Fed. Cl. 719 (2020), in which the Court of Federal Claims denied a refund claim because the taxpayers did not sign the amended return.  It turns out the Gregory case is part of a larger group of cases involving the same or similar issues.  The tax clinic at Harvard filed an amicus brief in the Federal Circuit regarding one of the cases in the group, Brown, on behalf of the Center for Taxpayer Rights.  The Court of Federal Claims has recently addressed another case in the group and one that has a slightly different fact pattern.

In Mills v. United States, No. 1:20-cv-00417 (Fed. Cl. 2021), the CFC issued another opinion in the long line of cases caused by accountant and lawyer John Anthony Castro, who is doing contingency fee refund suits involving IRC 911 exclusions for numerous people overseas. The first case decided by the Court of Federal Claims was last year and Gregory was among the first wave.

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In the earlier cases, the problem was that the Forms 1040X were substantively reviewed by the IRS and denied on their merits.  Only when the cases got to the CFC did the DOJ object that Castro signed the Forms 1040X, though his POA did not authorize him to sign for the taxpayers.  In these earlier cases, the taxpayers, relying on a Supreme Court opinion from the 1940s, Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945), argued that the IRS waived the signature defect by disallowing the claims on the merits rather than based on the lack of signature. 

In all of the cases decided so far, the Court of Federal Claims has held that the signature requirement is jurisdictional and not subject to waiver.  The judges dismissed all such suits without deciding whether a waiver might have occurred if the requirement were not jurisdictional.  An appeal to the Fed. Cir. has been taken only in one such suit, Brown, where the Center for Taxpayer Rights, as amicus, has argued that the whole requirement to file a refund claim is no longer jurisdictional under recent Supreme Court case law, so the signature requirement is also one that can be waived or forfeited by IRS inaction.

The Center cited, among other things, an opinion of the Fed. Cir. from 2020 named Walby, a case Carl Smith blogged here.  In Walby v. United States, 957 F.3d 1295 (Fed. Cir. 2020), a pro se tax protester case, a panel of the Federal Circuit joined a panel of the Seventh Circuit in Gillepsie v. United States, 670 F. Appx. 393 (7th Cir. 2016), in questioning, in dicta, their Circuits’ precedents holding that the administrative tax refund claim filing requirement at section 7422(a) is a jurisdictional requirement to the bringing of a refund suit, as probably no longer good law under recent Supreme Court case law

Mills differs from the prior cases in that, after the first set of Forms 1040X were signed by Castro, the IRS denied them on the grounds that Castro improperly signed them — i.e., not on the merits.  So, there could be no argument in Mills (unlike in the prior cases) that the IRS waived the signature requirement.  Castro responded by getting the CFC to dismiss without prejudice a prior suit Mills had brought and tried again. 

Mills filed new Forms 1040X on which to bring suit.  Mills was in Afghanistan, however, where he could not print out the Forms 1040X and sign them.  So, he affixed his digital signature to the new Forms 1040X.  This was done before the IRS authorized using digital signatures on Forms 1040X.  Waiting more than 6 months after the second amended returns were filed, Mills brought suit for refund.  The opinion just issued (which had initially been issued 2 weeks ago as a sealed opinion, but is no longer sealed) again holds that the claim filing requirement is jurisdictional — citing prior Fed. Cir. case law, but not mentioning Walby.  The court goes on to hold that Forms 1040X at the time these were filed could not be electronically signed.  Thus, the court dismisses this second Mills suit for lack of jurisdiction. All may not be lost for Mills, however, who can now, if he so chooses, go back and perfect his Forms 1040X for the third time, this time complying with IRS procedures for electronic signatures.

It is Carl’s view that Mills would not make a good test case for asking the Fed. Cir. to overrule its prior precedent on whether claim filing is jurisdictional to a refund suit because there is no possible way for Mills to argue for waiver on these facts (and, indeed, no waiver argument was ever made by Mills in this case).  Although the Court of Federal Claims in Mills may have been wrong to call the requirement jurisdictional, in any appeal, the Fed. Cir. would likely duck the jurisdictional question as not necessary to decide the case — just as it did in Walby.  In Brown, deciding whether or not the filing requirement is jurisdictional cannot be avoided, since the taxpayer has an argument for waiver that has not yet been considered by the CFC.

Fellow blogger, Jack Townsend, wrote to Les and I with the following comment:

In the conclusion, the court says:

“This result here is admittedly harsh. Mr. Mills was working overseas under difficult circumstances and made demonstrable efforts to sign the returns as best he could. The IRS could have accepted his digital initials as an appropriate signature but chose not to do so. If it is to process millions of tax-forms each year, the IRS may insist on strict compliance with its procedural requirements. The plaintiff’s second amended returns did not comply with IRS requirements and were therefore not duly filed. Under these facts, the Court lacks jurisdiction over the plaintiff’s refund suit and must dismiss the complaint.” (emphasis added by Jack)

In the bold-face, the court says IRS had authority/discretion to accept the returns but chose not to do so.  Could that decision be reviewed under the APA arbitrary and capricious standard or some review of discretionary decisions?

Les responded “I would think that an APA claim under 706(2)(A) could have been brought as part of the refund suit. Having failed to raise it the taxpayer is out of luck as the APA would not confer independent jurisdiction.”

Unintentionally, a whole group of taxpayers has been keeping lawyers interested in procedural issues occupied.  It’s possible that the Brown case could create some new precedent in the Federal Circuit that could have an impact on other circuits.  The digital signature problem faced by Mr. Mills is in some ways similar to the mailing problem faced by Guralnik and Organic Cannabis.  In both situations, the rules changed shortly after their failure to follow the old rules.  The old rules were changed because they no longer fit the circumstances but the last taxpayers to incorrectly attempt action under the old rules are paying the price.

Limitation on Issues Taxpayer Can Raise in Passport Case

The case of Shitrit v. Commissioner, T.C. Memo 2021-63, points out the limitations on raising issues other than the revocation of the passport when coming into the Tax Court under the jurisdiction of the passport provision.  Petitioner here tries to persuade the Tax Court to order the issuance of a refund but gets rebuffed due to the Court’s view of the scope of its jurisdiction in this type of case.

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Petitioner filed his case in Tax Court seeking to reverse certification, to determine he is not liable for any taxes for 2006, and to obtain a $3,000 refund.  While the case was pending, the IRS sent to the Secretary of State a reversal of the certification of petitioner as a seriously delinquent taxpayer.  After sending the letter reversing certification, the IRS moved to dismiss the Tax Court case as moot. 

This motion was consistent with prior Tax Court precedent established in the case of Ruesch v. Commissioner, 154 T.C. 280 (2020). In the Ruesch case, petitioner came into the Tax Court under the jurisdiction of the passport provision and asked the Court to determine whether the IRS had erred in certifying her as a person owing a seriously delinquent tax debt. Petitioner also asked the Court to issue a ruling to determine her underlying tax liability. The IRS had since reversed its classification of petitioner as seriously delinquent, informed the Secretary of State, and moved to dismiss the case as moot. The Court agreed with the IRS and dismissed petitioner’s case, holding that it lacked jurisdiction under IRC 7345 to determine petitioner’s underlying tax liability. The dispute did not, in the Court’s view, give rise to a justiciable controversy because no relief, other than reversal of the erroneous classification (which had already been granted by the IRS), could be granted by the court.

Based on the position of the Tax Court staked out in the Ruesch case, the Court granted the motion of the IRS but gave background on petitioner’s case nonetheless. Petitioner lives in Israel and is a dual citizen of Israel and the US. He did not file a 2006 US federal tax return. The IRS, however, had received third party information returns from three separate parties indicating that he had US income. For his convenience, the IRS prepared an IRC 6020(b) tax return for him.

I am sure that this happened after the IRS mailed him correspondence and probably several pieces of correspondence. Because of where he lived, it is likely he did not receive this correspondence. After sending a notice of deficiency, the IRS assessed the liability it had calculated and eventually the liability, because of the high dollar amount, was assigned to a revenue officer for collection. The IRS sent him a CDP notice which he did not claim.

In 2017, Mr. Shitrit filed US federal income tax returns for 2014, 2015, and 2016 showing his address in Israel. It is worth notice here that being outside of the US for more than six months triggers one of the provisions in IRC 6503 suspending the statute of limitations on collection. The IRS does not always know if a taxpayer is out of the country for more than six months but when it knows this it will input the information so that the collection statute is suspended. The IRS needs this suspension because of the difficulty it has in collecting taxes from taxpayers residing outside of the country. As we have discussed before, the IRS has only built collection language into five of the treaties it has with other countries. In countries with whom it lacks a collection treaty, the IRS can only collect if it can find assets of the taxpayer in the US. One of the benefits to the IRS of the passport provision is that it gives the IRS leverage over individuals in a situation in which it may have almost no leverage in its effort to collect delinquent taxes.

In this case, Mr. Shitrit did not owe the taxes, so the IRS did not need leverage, but the passport provision did cause him to become aware of the problem and to address it. It is unfortunate that the assessment existed since it did not exist through the fault of either the taxpayer or the IRS, but rather through the fault of a third party who stole his identity, triggering the information returns that were sent to the IRS, implicating Mr. Shitrit as someone who earned money and failed to file a return. Everything came to a head when the returns were filed in 2017 because he claimed a $3,000 refund. No surprise that the IRS offset the refund against the outstanding liability created for 2006 with the substitute for return.

Now that it had his correct address, the IRS sent him the seriously delinquent passport notice. He filed the Tax Court petition to address this notice. He retained the law firm of Frank Agostino and, although the opinion does not make this clear, I surmise that Frank’s firm figured out what happened to create the liability and took the steps to unwind the assessment, convincing the IRS that it was not Mr. Shitrit’s income. That worked well for ending the primary problem presented with passport revocation, but the small matter of the $3,000 refund still existed, and Mr. Shitrit sought to have the Tax Court make a determination that he was entitled to that refund.

The Court says that nothing in IRC 7345 establishing jurisdiction for passport revocation cases authorizes the court to redetermine a liability or to determine an overpayment. Among the other cases it cites following this statement, the Court cites to a Collection Due Process case, Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006), which this blog has often criticized. See prior discussions of this issue in the CDP context here and here. There are significant differences between the passport statute and the CDP statute, making some of the criticisms of the decision in Greene-Thapedi not as applicable in this context.

Mr. Shitrit argues that despite prior decisions, IRC 6512 grants the Tax Court jurisdiction to determine an overpayment and IRC 6402 gives the Court the power to order the overpayment. The Court disagrees. Arguments regarding mootness and voluntary cessation follow, with the IRS arguing the decertification has mooted the case and petitioner arguing that voluntary cessation by one party does not necessarily moot a case.

I expect that the IRS will refund the overpayment to Mr. Shitrit as it abates the 2006 liability, since an overpayment will be sitting on that account and the taxpayer has requested the money within the applicable refund period. If it does not, then Mr. Shitrit must incur the time and expense to go back into a different court to seek an order granting him the refund. It’s unfortunate that he could not wrap everything up in one proceeding.

Refund Claim Time Limits Create an Unwelcome Barrier

Today’s post is from occasional guest blogger Marilyn Ames, a retired Chief Counsel attorney. Marilyn is a Contributing Author who works with me on Saltzman and Book, IRS Practice & Procedure. She and I recently substantially revised the chapter on statute of limitations relating to refund claims, one of the trickiest areas in tax procedure. We also have just completed the last treatise update of the 2020 calendar year, and in that update we came across the sad case of Koopman v United States, which, as Marilyn discusses below, highlights how the rules in Section 6511 can lead to some harsh results. Les

For even the most experienced tax lawyers, one of the most confusing parts of the Internal Revenue Code is Section 6511, which sets out the statute of limitations for refund claims. For most claims, the requirements for filing a timely refund claim are contained in Section 6511(a) and (b), which consists of two parts. First, Section 6511(a) requires the claim for the refund to be filed with a period of three years from the time the return was filed or two years from the time the tax was paid. However, this is only the first hurdle that a taxpayer must successfully cross in order to get a refund. Section 6511(b) then provides that the amount of the refund is limited to the tax paid within the three-year period immediately before the claim is filed if the taxpayer filed the claim within three years from filing the return, as set out in section 6511(a). If the taxpayer had an extension to file the return, that period is added to the three-year period of subsection 6511(b) for determining the amount of the claim allowed. If the claim was filed within subsection (a)’s two-year period, then the refund is limited to the tax paid within the two years immediately prior to the claim. The two-year rule allows taxpayers to file a claim for refund if the taxpayer pays the tax more than three years after filing the return, and then wishes to challenge some aspect of the tax within two years of the payment. The subsection (b) limitations are often referred to as the “look-back” rules. Because of the look-back rules, taxpayers can file a claim for refund that is timely, but still be barred from receiving any part of the refund. The Supreme Court determined in United States v. Clintwood Elkhorn Mining Co. (553 US 1 (2008)) that taxpayers must meet the Section 6511 requirements in order for the court to have jurisdiction to hear a refund suit. (It should be noted that Section 6511 has a long list of exceptions to the Section 6511(a) and (b) requirements that apply in special cases.)

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These two requirements work together in a sometimes-Byzantine way that can create results that seem unfair to taxpayers.  The recent case of Koopman v. United States decided by the Court of Federal Claims in September of this year, illustrates the difficulties a taxpayer can encounter when trying to meet the requirements of both subsections (a) and (b) of Section 6511.  The taxpayer, William Koopman, retired from United Airlines in 2001. When he retired, he was covered by United’s non-qualified deferred compensation plan. Because of the special timing rule for FICA taxes, Mr. Koopman was required to pay the relevant portion of FICA on the present value of his deferred compensation in 2001, the year he retired, although he was to receive his benefits under United’s plan from 2001 through 2006. Unfortunately for Mr. Koopman, United filed a Chapter 11 bankruptcy in 2002, and he only received $248,293 of his deferred compensation instead of the $415,025.91 on which he paid FICA tax.  Instead of cash, he eventually received common stock in partial compensation, with the last distribution of the stock occurring in April of 2007.  

Mr. Koopman, unhappy he had paid FICA taxes on compensation he did not receive, filed a claim for refund in August of 2007 seeking a refund of the FICA taxes paid on the difference between the amount he actually received as deferred compensation and the amount on which he paid the tax. He subsequently filed suit in the Court of Federal Claims, and the United States filed a motion for lack of jurisdiction based on Mr. Koopman’s failure to meet the requirements of section 6511. Although Mr. Koopman was seeking a refund of only $2,416, he was not the only unhappy former United employee; the court notes that he had a co-plaintiff and that there are other cases involving the same issue.  

In ruling on the government’s motion to dismiss for lack of jurisdiction, the court held that under the deemed paid rules of Section 6513(c), United’s quarterly returns for 2001 were deemed filed and the FICA tax included on the returns was deemed paid on April 15, 2002.

Under Section 6511(a), Mr. Koopman only had until April 15, 2005 –three years after the returns were filed—to file a timely refund claim.  He missed that date by over two years.  Additionally, the court determined, under the look-back rules, the taxes were paid no later than April 29, 2004, as United had transferred credits to its FICA taxes for 2001 as late as April 29, 2002. Under Section 6511(b), no amount was paid within either the three-year or two-year periods looking back from the filing of the claim. Accordingly, because neither the three-year or two-year rule of Section 6511(a) was met, the court held it did not have jurisdiction over Mr. Koopman’s refund suit.

Mr. Koopman, pointing out the unfairness of this due to the litigation in the United bankruptcy that had prevented the final distribution being made to him any earlier, raised several arguments to try and overcome the barriers of Section 6511.  The court quickly disposed of his argument that Section 6511 did not apply to FICA taxes, as the statute expressly provides that it applies to any tax imposed by the Internal Revenue Code.  The court then rejected his argument that the statute of limitations should be equitably tolled, as the final determination that United was not going to pay him the full amount of the deferred compensation was made long after the statute of limitations on filing a refund claim expired.  Based on precedent, the court concluded that there is no equitable tolling of the refund statute of limitations as general principles of equity may not override the statutory requirements.  Mr. Koopman also argued that the statute of limitations should not begin running until the taxpayer has an opportunity to learn that the tax has been paid in error.  The court also rejected this argument, based on the precedent of another Supreme Court case, United States v. Dalm (494 US 596 (1990)). Although Mr. Koopman argued that application of Section 6511(a)’s time periods to his situation was unconstitutional under the due process clause, the court concluded that the United States can only be sued in its own courts under the express authorization given by Congress.  

Although situations such as Mr. Koopman’s seem to cry out for a remedy, Mr. Koopman could have acted earlier to protect his rights.  United filed bankruptcy in 2002, which should have been a red flag to Mr. Koopman that he was not going to receive all his deferred compensation.  He could have filed a protective claim for refund any time before April 15, 2005 that would have been timely, and then waited for the result of the bankruptcy litigation that was delaying a final determination as to his treatment.  The Internal Revenue Service is not only familiar with protective refund claims, but in some cases, reminds taxpayers who may be affected by ongoing litigation to file such a claim.  Earlier this year, the IRS issued a notice that the due date for filing a protective claim for the 2016 tax year for individual tax payments had been postponed until July 15, 2020, with an emphasis that this included claims involving the Affordable Care Act litigation.  The protective claim procedure allows tax practitioners to protect taxpayers whose rights may be affected by current litigation or expected changes in the law from being caught up in the Draconian maze of Section 6511 without a right to recourse if they wait for a final outcome.

Claiming a Refund Without Signing the Return

In the refund case of Gregory v. United States, No. 1:19-cv-00386 (Ct. Cl. 2020) the Court of Federal Claims denies the refund claim of a couple because they did not sign the amended return.  The issue of signatures has become more important during the pandemic because of the difficulties of meeting in person.  For the Gregorys the issue probably involved distance because they were working the Australian outback.  Still, the case shows that an actual signature can be an important step in making a request to the IRS.

The outcome for the Gregorys may change for others in their situation in the future.  On August 17, 2020, in IR-2020-182, the IRS announced that ” [m]arking a major milestone in tax administration, the Internal Revenue Service announced today that taxpayers can now submit Form 1040-X electronically with commercial tax-filing software.”  Read on and find out what happened to the Gregorys when electronic filing of amended returns was unavailable.

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The Gregorys are U.S. citizens but during the period at issue they worked as defense contractors at a facility near Alice Springs, Australia starting in 2015.  They timely filed their original 2015 return claiming a small refund.  The IRS sent them a notice of adjustment seeking to assess an additional liability.  I suspect the inquiry caused the Gregorys to ask around about their taxes.  This was their first year in Australia on this contract.  If it was their first year filing a non-resident return, they had many things to learn.  Over the course of the next couple of years they started learning them and they hired an accounting firm to review their return.  That firm determined that they had overpaid their taxes by more than $20,000 and prepared an amended return claiming the exclusion for foreign earned income and the exclusion for employer provided housing.  The amended return was signed by an employee of the preparer of the amended return and not by the Gregorys.

The IRS reviewed the amended return and allowed the refund claim but for $1,039 related to the housing exclusion.  They received a check and no doubt happily paid the preparer of their amended return for setting them on the right path in dealing with the special issues raised when working overseas.  For reasons that do not make economic sense to me, the Gregorys decided to file suit to recover the relatively small disallowed amount.  Instead of filing in district court, they filed in the Court of Federal Claims, an alternate forum for refund suits.

The IRS moved to dismiss the case arguing that the Gregorys did not sign the refund claim making the claim invalid.  The Gregorys countered that the IRS accepted the refund claim and paid them a refund of most of the amount claimed and should not, after doing so, raise the issue of valid signature.

The Court of Federal Claims went through the test of what a taxpayer must do in order to file a valid claim and obtain jurisdiction in a refund suit.  First, a taxpayer must meet the Flora full payment rule.  Second, a taxpayer must file a claim.  Third, the taxpayer must provide “the amount, date, and place of each payment to be refunded, as well as a copy of the refund claim when filing suit in the Court of Federal Claims.”  The Gregorys problem stems from the second requirement – a valid claim.

The court then walked through what makes a valid claim stating, inter alia, that it “must be verified by a written declaration that it is made under the penalties of perjury.”  The court explained why having it signed under penalties of perjury is important.  It also referred to the possibility of having the return signed by someone holding a power of attorney if the POA is attached to the return.  Here, it was not.

Then the court addressed the waiver doctrine raised by the taxpayers in their defense.  The court acknowledged that the IRS can waive compliance with its own regulatory requirements but cannot waive compliance with statutory requirements.  IRC 6061 requires “any return, statement or other document required to be made under any provision of the internal revenue laws or regulations shall be signed in accordance with forms or regulations prescribed by the Secretary.”  IRC 6065 provides “[e]xcept as otherwise prescribed by the Secretary, any return, declaration, statement, or other document required to be made under any provision of the internal revenue laws or regulations shall contain or be verified by a written declaration that is made under the penalties of perjury.”  Regulation 301.6402-2(c) allows for someone other than the taxpayer to sign under penalties of perjury only if a POA form accompanies the return.

The IRS argued that in partially allowing the refund claim it waived the regulation requiring the attachment of the POA but that to the extent it did not agree with the claim, it did not, and could not waive the signature requirement in litigation by allowing a part of the claim.  It pointed out the taxpayers’ argument could allow individuals to avoid the penalties of perjury requirement altogether.  The court agreed and dismissed the case.

Signature issues are becoming more and more important.  Electronic signatures are becoming more prevalent.  We now allow remote notarization in many states.  Individuals in many assisted living facilities that have locked down have no practical means of physically signing documents and often do not have computer capabilities.  Getting signatures or some type of verification on documents that allows the government or the interested party to know the validity of the approval while at the same time addressing the practical difficulties created by the pandemic, requires careful attention.

While the IRS allows individuals to file tax returns electronically, it has not historically allowed the filing of amended returns electronically requiring individuals like the Gregorys who live thousands of miles from their preparer to make arrangements to meet the signature requirements.  I don’t fault the IRS for wanting documents signed under penalties of perjury and requiring proof that the person submitting the claim is really the taxpayer.  Electronic signature tools exist.  New rules are coming out. 

The IRS issued a memo on March 27, 2020 that provides a temporary deviation from IRM signature procedures. The memo allows IRS employees on the collection side to accept images of signatures and e-signatures on a number of documents, including SOL assessment/collection extensions, closing statements, POAs, and generally any document collected “outside of standard filing procedures.”  The Tax Court issued a press release on August 6, 2020 which announces that electronically-filed stipulations with digital signatures will be accepted by the Court.  In Massachusetts, the Supreme Judicial Court issued a rule that authorizes e-signatures for all documents filed with Mass. courts. Numerous federal district courts have issued new rules accepting e-signatures, which can be found on this page.

Maybe next time the Gregorys can move forward in a case like this with the friendlier e-file rules, which could allow them to work with their accountant from thousands of miles away and still file a valid amended return.  I remain curious about their decision to sue for such a small amount and wonder about the decision dynamic that led to this case in a refund posture.

Exhaustion Can Be Exhausting

For taxpayers seeking a refund in federal district court or the Court of Federal Claims, it is black letter law that those courts only have jurisdiction if taxpayers timely file a proper refund claim with the IRS. In addition to filing the claim, to get into court taxpayers must either wait six months or file after receiving a claim disallowance. The disallowance (if issued) triggers a back-end limitation of two years to bring the suit.

Trakhter v US, a recent case from federal district court in California, highlights a number of the ways taxpayers may fail to satisfy the refund claim pre-requisites to get in court. 

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The case involved an audit that included a bank deposit analysis that resulted in IRS claiming the taxpayers Lenny Trakhter and Natalya Malakhova underreported over $350,000 in income from their construction company on their 2008 return. While the facts are skimpy in the opinion, IRS issued a notice of deficiency and the taxpayers did not file a Tax Court petition. It resulted in an assessment and ultimately an April 5, 2018 IRS levy of over $160,000.

In April of 2019, the taxpayers filed a request for audit reconsideration. After a few months passed with no word from the IRS, taxpayers’ counsel contacted IRS, which told counsel that it had no record of receiving the reconsideration. The taxpayers’ counsel resubmitted the audit reconsideration in July of 2019.

Still having not heard about the audit reconsideration, in February of 2020, counsel submitted a Form 843, Claim for Refund and Request for Abatement. In April of 2020, still having heard nothing from the IRS on the audit reconsideration or the Form 843, counsel filed a complaint in federal court seeking a refund. The government promptly filed a motion to dismiss for lack of jurisdiction.

The court granted the motion to dismiss. First, it held that the taxpayers failed to wait the required six months before filing suit. In reaching that conclusion, the opinion noted that the complaint was filed less than two months from the filing of the Form 843. The opinion highlights the relevant dates for the six-month rule.  Even if six months had elapsed at the time the court entertains the motion to dismiss, the key time check is at the complaint’s filing. In addition, the opinion notes that the taxpayers failed to file the correct form for the refund claim, which under the regulations is a Form 1040X and not a Form 843 when requesting a refund of individual income taxes.

In addition to filing the wrong form, the opinion noted that the form was not properly signed. The counsel submitted the Form 843 with an accompanying letter and POA. The regulations require that either the taxpayer or counsel sign the request under penalties of perjury. The mere inclusion of a POA with the claim, even if properly executed, “does not fulfill the penalty of perjury requirement” for the claim itself.

The oversights led to the court’s dismissing the lawsuit. I suspect at this point counsel will submit, if it has not already, a properly executed Form 1040X. What about the statute of limitation requirement that the taxpayers submit a refund claim within two years of the tax payment? After all, the levy was in April of 2018.  I suspect at this point the taxpayers would be able to argue that their prior submissions were part of an informal claim for refund, and the now properly completed 1040X would perfect the informal claim, which while not in proper form, was at least submitted before the two-year period elapsed. In the absence of the IRS denying the now perfected refund claim, taxpayers will have to wait six-months after submitting the 1040X and try again. Since the court’s dismissal is without prejudice, the taxpayers should eventually be able to get their day in court, though not nearly as quickly as they likely expected.

Federal Circuit Panel Calls For Reconsidering the Court’s Precedent Holding Refund Claim Filing and Timing Requirements Jurisdictional to a Refund Suit

In posts too numerous to cite, I have been calling for the courts to reexamine their prior precedents calling many tax filing deadlines and administrative exhaustion requirements jurisdictional.  In non-tax opinions issued by the Supreme Court since 2004, the Court has changed its precedent and held that “claims processing rules” that merely move litigation along are now almost never jurisdictional.  See, e,g. United States v. Wong, 575 U.S. 402 (2015) (Federal Tort Claims Act suit filing deadlines in agency and courts are not jurisdictional and are subject to equitable tolling); Fort Bend County v. Davis, 139 S. Ct. 1843 (2019) (Title VII charge filing requirement is not jurisdictional) (see here for my thoughts on the implications of Fort Bend to the tax world).  Now, a panel of the Federal Circuit in a pro se tax protester case, Walby v. United States, 2020 U.S. App. LEXIS 13711 (Apr. 29, 2020), has joined a panel of the Seventh Circuit in Gillepsie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016), in questioning their Circuit’s precedent holding that the administrative tax refund claim filing requirement at section 7422(a) is a jurisdictional requirement to the brining of a refund suit.  Further, the Federal Circuit panel in the Walby opinion stated it believes that the filing deadlines for tax refund administrative claims at section 6511(a) are no longer jurisdictional, also calling for overturning its Circuit’s precedent.

It will take an en banc Federal Circuit opinion to overrule the Circuit’s prior precedents, so the panels’ opinion in Walby doesn’t change that court’s precedents, yet.  But, it certainly makes it likely that the issues will reach an en banc panel soon.

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What is perhaps most surprising about the Walby panel’s statements is that the opinion below did not raise these concerns about recent Supreme Court opinions, but simply followed the Federal Circuit precedents holding that sections 6511(a)’s and 7422(a)’s requirements are jurisdictional.  Further, the DOJ brief in Walby in the Federal Circuit did not discuss the potential impact of the recent Supreme Court case law on this question, but merely cited prior Federal Circuit precedent.  And the pro se taxpayer, of course, did not complain about the Circuit precedents.  So, the panel on its own chose to research these issues and make its statement in a published opinion.

Here is what the Federal Circuit panel wrote in Walby on these issues:

In Walby’s case, her 2014 claims were deemed paid on April 15, 2015 because withheld income taxes are deemed to have been paid on April 15th of the following year. I.R.C. § 6513(b). To be timely, her administrative refund claim should have been filed with the IRS by April 15, 2017. But Walby did not file her refund claim until December 22, 2017. Walby’s 2014 refund claim was, therefore, untimely and the Claims Court properly dismissed that claim.

There is one aspect of the court’s conclusion regarding this claim, however, that warrants additional examination. The Claims Court concluded that, because Walby’s 2014 administrative refund claim was untimely, pursuant to 26 U.S.C. § 7422(a), it lacked subject matter jurisdiction over that claim. Although this conclusion is correct under our existing case law, see, e.g.Stephens v. United States, 884 F.3d 1151, 1156 (Fed. Cir. 2018), it may be time to reexamine that case law in light of the Supreme Court’s clarification that so-called “statutory standing” defects — i.e., whether a party can sue under a given statute — do not implicate a court’s subject matter jurisdiction. Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 128 n.4 (2014)see also Lone Star Silicon Innovations LLC v. Nanya Tech. Corp., 925 F.3d 1225, 1235 (Fed. Cir. 2019) (recognizing that, following Lexmark, it is incorrect to classify “so-called” statutory-standing defects as jurisdictional).

The Tucker Act grants the Claims Court jurisdiction to render judgment “upon any claim against the United States founded either upon the Constitution, or any Act of Congress . . . in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). Additionally, 28 U.S.C. § 1346(a) provides that the Claims Court shall have original jurisdiction (concurrent with the district courts) of “[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected.” As such, Walby’s failure to meet the § 7422(a) statutory requirement of a timely administrative claim for her 2014 tax claim would not seem to implicate the Claims Court’s subject matter jurisdiction; rather, it appears to be a simple failure to meet the statutory precondition to maintain a suit against the government with respect to those taxes.

The Supreme Court has not addressed § 7422(a) following Lexmark. We note, however, that the Court’s most recent discussion of § 7422(a) does not describe it as “jurisdictional.” See Clintwood Elkhorn Mining Co., 553 U.S. 1 at 4–5, 11–12. And, although our court has continued to refer to this statute as jurisdictional following Lexmark, we have not yet addressed the implications of that case and the many Supreme Court cases applying it.2

In view of the Supreme Court’s guidance in Lexmark, it may be improper to continue to refer to the administrative exhaustion requirements of § 7422(a) and § 6511 as “jurisdictional prerequisites.” That these provisions concern the United States’ consent to be sued would not seem to change this conclusion. The Supreme Court has “made plain that most time bars are nonjurisdictional.” United States v. Kwai Fun Wong, 575 U.S. 402, 410 (2015). In Kwai Fun, the Court held that the time bar in the Federal Tort Claims Act is nonjurisdictional. In doing so, it rejected the Government’s argument that, because that time bar is a precondition to the FTCA’s waiver of sovereign immunity, the time bar must be jurisdictional. As it had in Lexmark, the Court distinguished jurisdictional statutes from “quintessential claim-processing rules which seek to promote the orderly progress of litigation, but do not deprive a court of authority to hear a case.” Id. (internal quotation marks omitted). It did not except statutes that implicate the government’s waiver of sovereign immunity from that distinction.

In reaching this conclusion, the Court relied on Arbaugh v. Y&H Corp., where, finding Title VII’s numerical employee threshold nonjurisdictional, the Supreme Court stated:

“If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.”

546 U.S. 500, 515–16 (2006). This “clear statement” rule “does not mean Congress must incant magic words. But traditional tools of statutory construction must plainly show that Congress imbued a procedural bar with jurisdictional consequences.” Kwai Fun, 575 U.S. at 410 (internal quotation marks omitted). There is no such clear statement apparent in the statutes at issue here, 28 U.S.C. § 7422(a) and § 6511(a).3 Other courts also have begun to question whether the time limits and administrative exhaustion requirements in these and other tax provisions should continue to be deemed jurisdictional. See Gillespie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016) (whether § 7422(a) is jurisdictional); Bullock v. I.R.S, 602 F. App’x 58, 60 n.3 (3d Cir. 2015) (whether I.R.C. § 7433 is jurisdictional). As to at least one administrative exhaustion requirement, one court has held that it should not be deemed jurisdictional. See Gray v. United States, 723 F.3d 795, 798 (7th Cir. 2013) (I.R.C. § 7433 “contains no language suggesting that Congress intended to strip federal courts of jurisdiction when plaintiffs do not exhaust administrative remedies”); cf. Duggan v. Comm’r of Internal Revenue, 879 F.3d 1029, 1034 (9th Cir. 2018) (I.R.C. § 6630(d)(1)‘s 30-day filing deadline “expressly contemplates the Tax Court’s jurisdiction . . . the filing deadline is given in the same breath as the grant of jurisdiction.”).

Accordingly, although the Claims Court properly dismissed Walby’s 2014 refund claim because she did not meet the prerequisite for bringing such a claim, we think that, under LexmarkArbaugh, and their progeny, the court likely did not lack subject matter jurisdiction over this claim.

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2. See, e.g., Stephens v. United States, 884 F.3d 1151, 1156 (Fed. Cir. 2018); see also Ellis v. United States, 796 F. App’x 749, 750 (Fed. Cir. 2020); Langley v. United States, 716 F. App’x 960, 963 (Fed. Cir. 2017).

3. We are mindful of the Supreme Court’s pre-Lexmark jurisprudence concerning § 7422(a). In United States v. Dalm, the Court held that the district court lacked jurisdiction over gift tax refund suit because “[d]espite its spacious terms, § 1346(a)(1) must be read in conformity with [§ 7422(a) and § 6511(a)] which qualify a taxpayer’s right to bring a refund suit upon compliance with certain conditions.” 494 U.S. 596, 601 (1990). The Court referred to the statutes as “controlling jurisdictional statutes.” Id. at 611. But this view was a departure from the Court’s prior commentary on a predecessor to § 7422(a), recognizing that it “was not a jurisdictional statute at all; it simply specified that suits for recovery of taxes, penalties, or sums could not be maintained until after a claim for refund had been submitted.” Flora v. United States, 362 U.S. 145 (1960).

If you would like to read a little of the Gillespie opinion of the Seventh Circuit, see my post on it here.  It was the statements within Gillespie questioning whether section 7422(a)’s claim-filing requirement is still jurisdictional that the DOJ cited for its decision, post-oral argument, in Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017), to file a memorandum of law arguing that the section 6213(a) Tax Court deficiency jurisdiction filing deadline is still jurisdictional – a point with which the Seventh Circuit in Tilden agreed, despite Gillepsie.  See my post on Tilden here.  Of course, as I have noted before, the Harvard tax clinic continues to litigate the issues under section 6213(a) of whether the filing deadlines are still jurisdictional or subject to equitable tolling; companion cases on that issue are currently pending in the Ninth Circuit (and have been pending for over 6 months after oral argument there).

Observations

For most refund suit plaintiffs, it will make little difference whether the section 6511(a) and 7422(a) requirements are jurisdictional, since no one expects the Supreme Court to overturn its ruling in United States v. Brockamp, 519 U.S. 347 (1997), that the filing deadline of section 6511(a) is, in any case, not subject to equitable tolling.  So, who might benefit from making these two requirements nonjurisdictional?  Well, there are always a small number of cases where the DOJ could make an argument that the refund claim filing deadline was missed or that a refund claim was not in proper form, but the DOJ either chose not to raise those issues or just missed that the DOJ had potential arguments under those provisions.  Under current law, treating the requirements as jurisdictional, courts should step in in such cases and police their jurisdiction by raising issues not raised by the DOJ.  But, if the claim filing requirement and claim filing deadline are not jurisdictional to a refund suit, then, in such cases, the court will no longer worry about the issues if the DOJ never raises them.  Non-jurisdictional conditions of suit are merely affirmative defenses.  If the DOJ doesn’t raise an affirmative defense (either accidentally or knowingly), it simply forfeits or waives the defense.  Indeed, if the DOJ wanted to expeditiously litigate a test case brought by a plaintiff who hadn’t yet filed a refund claim, if the claim filing requirements is no longer jurisdictional, the DOJ could choose to waive any argument that a claim should have been filed before suit was brought.

Offset – Whose Funds Does the IRS Hold

In the recent case of Laird v. United States,  (5th Cir. 2019) the court addressed the issue of whether the IRS could offset an overpayment resulting from an attempted designated payment.  The Fifth Circuit distinguished earlier circuit precedent that the IRS could offset extra money that a taxpayer sent by creating a rule that the IRS can only do so when it applies the extra money to the tax account of the person remitting the money.  The rule makes sense but here the facts get muddy.

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If you have never represented someone who might have the trust fund recovery penalty (TFRP) assessed against them, you might wonder why one taxpayer would pay the taxes of another.  Sure, there are many good and generous people in the world and we are in the giving season, but still, the payment of someone else’s taxes is not a customary holiday gift nor an ordinary act at any time of the year.  The picture becomes clearer when the TFRP enters the picture.  Let’s look at a typical fact pattern.

Corporation A builds buildings.  It has 20 employees.  Business has been slow, but it expects a turnaround at any time.  Corporation A has a cash flow problem.  To get it through the lean times, it looks for ways to conserve cash.  One way it decides to do this is to pay its employees their salaries, otherwise they will walk, but to hold off on paying the IRS the withheld taxes and the employer’s share of FICA.  Corporation A anticipates that it will soon have a contract that will allow it to make the tax payments and has no intention of stiffing the IRS.  Unfortunately, the business downturn lasts longer than it anticipates, and some of its accounts do not pay on time.  The unpaid taxes build up for several months at which time a friendly revenue officer appears at the door of Corporation A to demand payment, or levies will occur and the responsible officers will have the TFRP assessed against them pursuant to IRC 6672.

An officer of Corporation A, Bob, decides that the best thing to do in order to avoid the consequences of non-payment of the taxes is to pay them himself.  He sends the IRS a check for the unpaid taxes and designates on the check how the funds should be applied.  Unfortunately, he miscalculates the amount of debt that brought the revenue officer to the door of Corporation A and he sends a check for too much.  While it does not happen too often that a corporate officer sends in too much in this situation, it does happen, and it did happen in the Laird case.

The IRS knew what to do with the extra money.  It applied the funds to another debt of Corporation A which had not yet reached the hands of the revenue officer or it applied the debt to the non-trust fund portion of Corporation A’s outstanding liability.  Bob did not intend to pay the non-trust fund portion of Corporation A’s debt because he had no personal liability for this debt.  He only sought to pay the trust fund portion.  He requests that the IRS return to him that portion of the check which overpaid the liability he sought to satisfy.  The IRS argued that it had the right to offset this money against other debts of Corporation A.

In the case of United States v. Ryan, (11th Cir. 1995), the Eleventh Circuit answered the question in this case by holding that the IRS could keep the extra amount of a check sent in with a specific designation; however, in Ryan the taxpayer sending the check was the same taxpayer who owed the money.  In Laird the person sending in the money, like Bob, is not the taxpayer.  The entity, like Corporation A, is the taxpayer.  The Fifth Circuit holds that this distinction makes a difference.  Here, it holds that the individual (Bob) may require the excess amount be returned to him.  In the case, however, these facts were unclear.  The Fifth Circuit could not tell the true source of the funds.  So, it remanded the case to the district court for a determination of the true payor of the funds.  If the IRS can show that the corporation really paid the funds instead of the individual, then the IRS will be allowed to offset the funds.  If the individual can show that the money was his, then the IRS must return the money to him.