Appeals – Suit for Refund
Hi Dale! I’m in a real pickle here: I owe over $100,000 in state taxes. A while ago I heard one of those 800 number ads on the radio and called in. I eventually hired them to help me, but it seems that everything they’ve done has failed. All the court filings come back denied—usually because it was filed late or the claim had not gone through the proper channels. Now the 800 number folks are telling me that I’m out of options…the only thing I can do is to make arrangements to pay in installments. I have the means to pay the whole bill, but I believe I have a defense to the bill in the first place—in other words, I don’t believe I owe the tax at all, but I cannot get to anyone who can hear my side and make that decision. Can you help me…?
The short answer is “Yes” (at least I think so at this point). I’ll explain but bear with me as what I’m about to tell you will seem quite counterintuitive at first.
Sometimes you get to a point in the process where all of your rights have been forfeited. All the notices with the explanation of your rights, all the 30-day deadlines, and all the other provisions that allow you to engage and pull levers within the system have come and gone. Most of the time it is because a taxpayer has sat on his/her hands and has not exercised his/her rights. Sometimes, however, it is because of malfeasance on the part of a professional who misses a deadline or misfiles something and your case gets screwed up (not sure if that is the case here, but it happens sometimes). Your 800 number folks must not litigate much, so they are probably unaware of an option yet available to you that could possibly save your case and allow you the chance to get your claims and/or defenses heard.
Are you ready for it? Here it is…
Pay the tax bill in full.
No, I’m serious. There is a technique in tax law called “Suit for Refund”. In other words, when all else has failed, you can pay the tax bill—and that means the underlying tax, penalties, and interest— and then request a refund for whatever you believe you have overpaid (the amount you think you do not owe). When the taxing agency refuses to issue a refund, you then sue them for a refund. The trial in this matter is likely de novo, or literally anew or afresh. This technique is especially useful in cases where you’ve tried to explain your defense but bureaucrats and administrative types deny you every step of the way. It is also helpful when you have missed a deadline to file an appeal or make a claim during the administrative process. It is also a strategic (albeit a risky move) tactic to remove your case from an unfriendly, unyielding Revenue Officer and over to a more flexible Appeals Officer.
While your case has to do with a state tax issue, I will use the IRS as a guideline as most states follow pretty closely—with a few idiosyncrasies here and there depending on the state—IRS rules, regulations, and procedures.
Suing for a refund involves an overpayment of tax. The government is not entitled to collect (or keep) more tax than is actually owed. If you have overpaid a tax, you are entitled to request a refund. The first step is to always request the taxing agency to issue a refund. When it comes to IRS, you must file a 1040X for each year you are claiming a refund, and you must be very specific about how you got to your conclusion that you overpaid.
You have a limited time within which to make the claim. You have the longer of either 3 years after you filed the initial return upon which you overpaid or 2 years after you made the payment— whichever is longer. For example, you file a return showing that you owe. You would normally have 3 years to file for a refund. However, if you have not yet paid the money owed, you can make that payment and then you would have 2 years from the date of the payment.
In this case, if you paid when you filed the return, you have 3 years to file for a refund because the 3 year period is the longer of the two periods.
However, if you failed to pay until (let’s say) 5 years after you filed the refund, you have an additional 2 years to claim a refund. In this case, you are limited to only the tax actually paid.
If you were entitled to a credit or some other kind of offset which would result in a refund, your late payment would extinguish that as you can only claim a refund the tax actually paid. In the first scenario, you could claim both the tax actually paid and the credits and/or offsets.
There are exceptions to the deadlines to claim for refunds, but they are mostly for taxpayers affected by disasters and/or terrorism. Other things that are not time-barred have to do with a debt or security that becomes worthless (and thus affects your tax calculations years back, payment of foreign taxes, a net operating loss carryback, and a carryback of certain tax credits. These are unique and specific situations not well suited to a general discussion on a website or blog and require a deep level of analysis by a tax professional (ideally by someone who understands both tax accounting and tax law….) You can also get a waiver if you suffer a “financial disability” which is a situation where your health is impacted substantially by your medical and/or mental fitness.
Generally speaking, this is a situation that can be expected to last beyond a 12 month period or can be reasonably expected to result in death.
Once IRS has processed your claim, they will send you a notice that your claim has been denied, accepted as filed, or that it needs an examination (think “audit” here). You have 2 years once the claim is denied to appeal either to the US District Court or the US Court of Federal Claims. This is the nugget you are looking for in this haystack. Keep in mind that the 2-year time limitation begins on the date that the first notice of denial is sent. Subsequent notices (such as a notice that has been reconsidered) has no impact on the 2-year deadline.
Filing a lawsuit for a refund transfers your file out of the IRS Collections division and into the Appeals division. An IRS Appeals Officer has much broader discretion to consider your claims for a refund than does a Revenue Officer. This may actually be the first time you get to present your claims
or defenses to the underlying tax, and it is the time to begin negotiation with IRS (or your state taxing authority) before actually going to court. Oftentimes, a case can be settled once you get to someone who has the authority to sit down and listen to you and examine your proofs (evidence). Of course, that is not a guarantee and you actually have to go to court, but you definitely have a path to be heard in this matter.
BOTTOM LINE: Paying the tax in full (including penalties and interest) and then suing for a refund is a risky tactic, but sometimes it is the only or best option to get your tax issues where you want them: in front of someone willing to listen and examine your claims. That may be a judge in a US Federal or state district court, but often these types of cases resolve before a judge ever lays eyes on your file.
Your tax problems are solvable, and I know exactly how to help you get the best results for you in your situation. Having the advice and guidance from a seasoned and experienced professional—both as a CPA and as a licensed tax litigator (for decades) could tip the balance in your favor.