Refund Claims and Recovering Fees from IRS

Question 1

What are the rules for refund claims?

On what form?

Who must file a refund claim?

Answer 1

• Generally have 3 years from the time the return was filed (see IRC 6513), or 2 years from the time the tax was paid, WHICHEVER period expires later. IRC § 6511
• On a Form 1040X (Amended U.S. Individual Income Tax Return), Form 1120x (Amended U.S. Corporation Income Tax Return) or Form 843 (Claim for Refund and Request for Abatement).
• Taxpayer typically is the one who must file claim. Previously, a third party who pays the tax of another taxpayer under protest had standing to seek a refund. United States v. Williams. However, Congress passed IRC 6325(b)(4) and 7426(a)(4), which allows a person to make a deposit or furnish a bond to receive a discharge of a tax lien and then sue to contest the tax lien. When a more specific statutory remedy exists, third party cannot bring claim for refund.
• You can’t have your business pay your trust on tax and bring a refund to pay it yourself.

Question 2

What are the 4 refund info requirements when making refund claim?

Answer 2

1. State in DETAIL EACH GROUND upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis. The statement of the grounds and facts must be VERIFIED by a written declaration that is made under the penalties of perjury.
2. Must be made on the form prescribed for the type of claim.
3. Separate claims for each type of tax for each taxable period.
4. File at the appropriate IRS location.
   * Must state your claim in detail first in order for IRS to review that specific claim; you can’t add additional claims.

Question 3

What is the informal claim doctrine?

Answer 3

= Basically, if you fail to file refund claim that doesn’t meet all requirements, can still be treated as timely if the defects are small.

ALLOWS a claim for refund that does not meet the requirements under the IRS’s regulations to be “treated as ADEQUATE where formal defects and lack of specificity have been remedied by amendment filed after the lapse of the statutory period.” United States v. Kales.

Applies only to procedural defects, such as missing signature. BCS Fin. Corp. v. US

Does NOT cure more major defects, such as failure to provide grounds for refund or facts sufficient to apprise the commissioner of the claim’s basis.

Question 4

1. What is the deadline for a lawsuit if your refund claim is disallowed?
2. What is the deadline for a lawsuit if the IRS never responds to your refund claim?
3. Can the 2-year deadline be extended?

Answer 4

There are 2 deadline options for filing refund lawsuits:

1. If the claim is disallowed, the taxpayer has 2 YEARS from the date the notice of disallowance is mailed by either certified or registered mail. This two-year period can be extended by agreement with the IRS
2. If IRS NEVER responds to your refund claim or they’re taking forever = wait 6 months to file action.

So, you cannot file refund suit until either:

1. The claim has been disallowed by the IRS; OR
2. Six months have expired since the date on which the claim was made (This means that if the IRS does not act, the time to file suit may never expire).
3. Yes, the 2-year deadline can be extended by agreement, but you must obtain extension before the 2-year deadline is over.

Question 5

Where are the 2 places you can bring your refund lawsuit?

Answer 5

1. United States District Courts
   - 94 districts throughout the states and territories
   - Article III Court
2. United States Court of Federal Claims
   - Based in Washington, D.C. ; All the cases before the Court of Federal Claims involve a monetary dispute between the plaintiff and the United States; tax cases make up a substantial subset of those cases.

United States Department of Justice attorneys represent the government. Either from the Tax Division or the local US Attorney’s Office (S.D.N.Y and C.D. Cal.)
- IRS Chief Counsel attorney will also be assigned to the case, but typically will not appear in court.

Question 6

What is the full payment rule under US v. Flora?

Do you also have to pay the interests and penalties?

Answer 6

• Holding: “§ 1346(a)(1), correctly construed, requires full payment of the assessment before an income tax refund suit can be maintained in Federal District Court.”
• Therefore, for most types of taxes, you cannot partially pay the tax and seek a refund. Rather, for the court to entertain the refund suit, the taxpayer must fully pay the tax liability.
• Courts are split on whether the taxpayer must also fully pay the associated INTERESTS and PENALTIES.
• See Mangone v. United States, (2d Cir.) (“full payment rule requires… full payment of the assessment, including penalties and interest”)
• Shore v. United States, (Fed. Cir.) (full payment rule… does not require prepayment of interest and penalties when the taxpayer only disputes the tax assessment.”

Question 7

What is the exception to the Flora full payment rule?

What are divisible taxes?

Answer 7

• When a tax is divisible, only a portion of the tax must be paid before a claim (and subsequent refund suit) is filed.
• Divisible taxes are those that “may be divided into separate portions or transactions.” IRS Chief Counsel Memo No. 200646016.
• Government will counterclaim for the remaining balance.
• Classic example is the § 6672 employment tax penalty. Only need to pay the unpaid withholding tax for one employee. IRM states that the taxpayer needs to pay the unpaid tax for one employee PER DISPUTED QUARTER (IRM 8.25.1.7.4.1).

Question 8

How do you recover fees from IRS under IRC 7430?

What fees can you recover?

What is considered “attorney’s fees”

The fee awards are limited to what amount?

Do the fee awards apply to high net worth taxpayers?

Answer 8

• IRC 7430 permits courts to award “reasonable litigation costs” and “reasonable administrative costs” to the “prevailing party” in any “administrative or court proceeding … brought by or against the United States in connection with the determination, collection, or refund of any tax, interest or penalty” under the IRC.
• These costs can include administrative fees, costs of analyses and studies “necessary for the preparation of the party’s case,” and attorney’s fees.
• “Attorney’s fees” may be awarded for the fees of any practitioner authorized to practice before the IRS, even if not an attorney (CPA, enrolled agents, etc.)
• Fee awards are currently limited to a maximum of $200 per hour, unless the court finds that a higher rate is necessary because of higher cost of living, or because of a “special factor” such as limited availability of qualified practitioners.

NO, DOESN’T APPLY TO HIGH NET WORTH TAXPAYERS

Question 9

How do you argue that you have “special factor” that would get you higher recovery fee reward under IRC 7430?

Answer 9

• Can get higher fees if you show people like you are rare
• Tax cases = just being a tax lawyer isn’t special expertise, it has to be something above that to show you can get tax specialist fees

Question 10

What 5 things must a taxpayer show to qualify for an award of reasonable litigation costs under IRC 7430?

Answer 10

1. the taxpayer meets the net worth requirements:
   (i) individual = net worth at the time of the proceeding does not exceed $2 million;
   (ii) a non-profit organization or an agricultural cooperative, regardless of its net worth; or
   (iii) a partnership, corporation, association, local governmental unit, or the owner of an unincorporated business, who, at the time of the proceeding, has a net worth of $7 million or less, and does not have more than 500 employees at that time;
2. the taxpayer substantially prevailed;
3. the position of the United States was not substantially justified;
4. the taxpayer exhausted administrative remedies; and
5. the taxpayer did not unnecessarily protract the proceeding.