We have written on several occasions about the exception to the two and three-year lookback periods of IRC 6511 that exist as a possibility if the taxpayer can show financial disability. You can find posts on the subject here, here and here. This year my clinic represented someone making the financial disability argument in Tax Court, where petitioners can make refund claims but do so less frequently than through district court litigation. We succeeded in obtaining a concession of the refund despite the client’s primary use of providers not described in Rev. Proc. 99-21; however, the case of Schmidt v. Internal Revenue Service, No. 2:20-cv-02336 (E.D. CA. 2021) provides another example in the government’s streak of victories against individuals seeking to extend the statute of limitations through financial disability. Like the majority of litigants raising this issue, she proceeded pro se.
Ms. Schmidt filed her 2013 return late on February 22, 2015. On December 15, 2017, she filed an amended return seeking a refund of $31,904. The IRS sent her a letter informing her that it intended to disallow her claim due to lateness. She wrote back, obviously confused by the somewhat confusing construct of IRC 6511, arguing that she filed her amended return timely within three years of the filing of her tax return. She did file the amended return within three years of filing her original return for 2013; however, the filing of the return within three years was not the important fact here. Most important, as the IRS pointed out, was the three-year lookback rule of IRC 6511(b)(2), which limited her refund to payments with three years. Since the payments occurred on the original due date of the return because withholding credits get credited on that date, she filed her amended return too late to recover any money even though she filed her amended return within three years of filing the original return.
Once Ms. Schmidt understood the lookback rule, she pivoted and began arguing that she missed the time period for timely filing the amended claim due to financial disability.
Plaintiff acknowledges the Refund Claim did not demonstrate financial disability to the IRS and argues it would have been illogical to submit the information at that time because she was still sick and still meeting the requirements for financial disability for all of 2017.1 In addition, when plaintiff received notice of the IRS’s intent to disallow the Refund Claim, plaintiff believed the IRS was rejecting the Refund Claim for a reason other than the time limits of 26 U.S.C. § 6511(b)(2). Plaintiff asks the court to consider the evidence submitted with her complaint of her financial disability based on the special circumstances of her case, including the fact that the IRS issued a Private Letter Ruling (PLR) declaring the 2013 disability income tax-exempt.
Now, she hits another roadblock for those seeking a refund – variance. While I think the court imposes the variance rule against her, it does not use that term, but instead discusses how her refund claim fails to meet the onerous requirements of Rev. Proc. 99-21. It lists the requirements set forth in the Rev. Proc. and notes that she met none of them. She submitted no information about financial disability with her amended return. The court does not offer her a chance to submit it at this point. Some of the prior cases in which IRC 6511(h) has been raised did allow the taxpayer to supplement their submissions, though in those cases the taxpayer may have engaged in more signaling about the possibility of financial disability than Ms. Schmidt did in filing her amended return.
She appears to have disability issues. The information in the opinion does not provide a basis for deciding if she might have succeeded had she submitted her request with the amended return. It also does not make clear whether she has a valid refund claim. I don’t blame the court for these omissions since that information has nothing to do with the basis for denial of her claim; however, the result is harsh. A pro se individual will struggle to take the correct procedural steps. A disabled and sick pro se individual will struggle even more. The law does not need to require such precision that she must file with her claim a full blown statement as required by the Rev. Proc. and the Rev. Proc. does not need to make the requirements as draconian as it does.
I have sympathy for Ms. Schmidt but the financial disability provision designed to assist people struggling to make life work offers little sympathy. The mismatch between the purpose for the law and the administration of the law continues.