Refund Claims and the Specificity Requirement

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A trio of cases have recently seen the IRS raise the specificity requirement in claiming a refund.  In opposition to the motions filed by the IRS, the taxpayers have raised waiver as a defense.  The results are interesting and instructive.  Of course, you don’t want to plan for having to defend against a failure to meet the specificity requirement but understanding how to defend against this argument can be useful.

When a taxpayer seeks a refund, the taxpayer must give the IRS a fair opportunity to administratively determine whether it should grant a refund.  If the claim filed by the taxpayer does not point the IRS in the right direction with enough information to allow to it understand the issue being raised by the taxpayer, then the taxpayer’s claim may fail the specificity test.

In Premier Tech v. United States, No. 2:20-cv-890-TS-CMR (D. Utah 2021); Intermountain Electronics v. United States, No. 2:20-cv-00501-JNP (D. Utah 2021); and Harper v. United States, 847 F. Appx. 408 (9th Cir. 2021) the courts grappled with the claims filed by the taxpayers.  The IRS objected that the claims lacked specificity and that the complaints did as well.

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In Intermountain Electronics, the court held that the IRS had waived the specificity requirement by processing Intermountain’s refund claim, so the court had jurisdiction.  Even though it ruled favorably on the claim itself, the court found that the taxpayer’s complaint was not sufficient to state a claim under Rule 12(b)(6) under the Twombly/Iqbal plausibility pleading standard.  Carl Smith has written about the pleading issues raised by Twombly/Iqbal previously here and Patrick Thomas has written about it here.  The court allows the taxpayer to amend the complaint to make it more detailed and not just spout legal requirements from the research credit statute.

The court states without discussion that the refund claim filing requirement of 7422 is jurisdictional — a point currently pending in the Brown case before the Federal Circuit and a point raised in the cases of Walby v. United States, 2020 U.S. App. LEXIS 13711 (Apr. 29, 2020), which joined a panel of the Seventh Circuit in Gillespie v. United States, 670 F. App’x 393, 394–95 (7th Cir. 2016) questioning this position.  The issue and these cases have previously been discussed here and here.  Although it fails to mention Walby and Gillespie, the court discusses the Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945) opinion of the Supreme Court from 1945, where the Supreme Court held that the specificity requirements for a refund claim are waived if the IRS reviews and denies the claim on the merits because those requirements are only regulatory and therefore subject to waiver.  The district court in Intermountain notes that the taxpayer appears to have done all that was required under IRS forms by filling out the Form 6765 required for claims of research credits and attaching that form to its amended returns.  While the court is skeptical that the taxpayer had to attach a lot more unrequested information than the Form 6765 to create a valid claim, it does not decide that issue, but holds that the IRS waived the specificity requirements, even if the claims were initially insufficient. 

The court writes, as to the facts: 

As a result of the amended returns, the IRS initiated an examination to determine Intermountain’s eligibility for the credits. Over the course of an approximately five-year examination, the IRS requested and received substantial amounts of information from Intermountain. The IRS ultimately disallowed Intermountain’s claim for credits for both years, concluding both that much of the work performed by Intermountain employees did not constitute qualified research and that Intermountain failed to adequately substantiate its claims through the evidence it provided to the IRS. See ECF Nos. 26-3, 26-4, 26-6.  

The court notes that this case is virtually on all fours with a 9th Cir. opinion from earlier this year also involving research credit claims, Harper v. U.S., where the 9th Cir. held that due to a long audit of a Form 6765 attached to a refund claim, the IRS had waived the specificity requirements.  In both cases, the IRS received tons of documents from the taxpayers while the refund claim was audited, and the formal claim disallowance did not mention a specificity requirement defect, just that the taxpayer hadn’t shown entitlement to the claimed refund (which appears to be a denial on the merits).  (A concurring opinion in Harper would have held that the suit was valid because the taxpayer had made an informal claim, not that there had been a waiver.)

In Premier Tech provides a similar opinion decided a day earlier than Intermountain by another judge in the D. Utah, where it appears the judges must have coordinated their opinions. Premier Tech also involves a section 41 research credit refund claim.  Again, the taxpayer filled out a Form 6765 and attached it to the refund claim, and the IRS argues that alone was insufficient to meet the specificity requirement.  Unlike in Intermountain, though, while the IRS also audited the refund claim, the IRS never issued a notice of disallowance to Premier Tech, so suit was brought based on the rule regarding the passage of six months without such notice.  As a result, there is no argument in Premier Tech that the IRS waived the specificity requirement (the Angelus Milling argument).  Thus, the judge in Premier Tech is forced to decide the issue that was dodged in Intermountain — whether the refund claim met the specificity requirement.  The Premier Tech court holds that the specificity requirement was met and, unlike in Intermountain, that the complaint properly states a claim on which relief could be granted.  (In Intermountain, the judge held that the complaint did not state a claim, but allowed the taxpayer to amend the complaint to provide more detail.)  The reasoning in Premier Tech for finding the claim specific enough reads very similar to the reasoning expressed in Intermountain (but which was dicta there):  

Nevertheless, the United States argues that the amended return is not sufficient because Premier did not attach additional documents addressing every single element in 26 U.S.C. § 41, such as describing the research conducted, explaining how that research worked to develop a business component, detailing on whose wages and what supplies the money was spent, and proving the amount spent on research in the prior three tax years. But the United States offers no authority for imposing such a requirement. Form 6765 does not ask taxpayers to provide any of these details. If the IRS wants more information about the research tax credits, the IRS could require that information on Form 6765. It does not, and the IRS cannot now say its own forms are not sufficient to constitute claims for refunds. That would lead to absurd and patently unfair results for taxpayers. Furthermore, under the government’s position, no tax return claiming tax credits for increasing research activities could possibly constitute a claim for a refund. This is directly contradicted by 26 C.F.R. § 301.6402-3(a)(5).

In cases in which the taxpayer provides a wealth of detailed information to the IRS as part of the claims process and in cases in which the IRS rejects the refund claim on the merits, these cases show that the Department of Justice will struggle when it seeks to stop the litigation pointing to defects in the claim itself for failure of the claim to provide the IRS with enough information to adequately consider whether to grant the refund.  Even though DOJ may have correctly identified a poor refund claim, if the IRS acted in such a way that shows it understood what the taxpayer sought in requesting the refund, then courts will struggle to turn the taxpayer away on this basis.  The best practice is to carefully state the basis for the refund claim but where the facts show that the taxpayer provided enough information for the IRS to understand what the taxpayer wanted, the case will likely survive the types of challenges DOJ makes in these cases.

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