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.
read more...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.
About Leslie Book
Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.
If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.