Dealing with the IRS can be a dangerous labyrinth for the untrained taxpayer or their non-tax advisors. In a recent Federal court case, E. John Rewwer, et al. v. United States, the taxpayers filed the wrong form claiming a refund and both the IRS and the DOJ Tax Division cried foul and tried to dismiss their case.  Fortunately, the court found that the taxpayer’s filing met the “informal refund claim” requirements and denied the government’s motion.

The taxpayers received an unfavorable audit determination increasing their tax liabilities for 2007, 2008 and 2009.  All amounts were paid and the taxpayers then filed IRS Form 843 (Claim for Refund and Request for Abatement) for all three years. The taxpayer’s attorney, not the taxpayers, signed the requests for refund but didn’t include IRS Form 2848 (Power of Attorney). The IRS allowed the 2008 claim but then denied the 2007 and 2009 claims, so the taxpayers appealed within the IRS.  A taxpayer generally has two years from the date of the determination to file a refund suit in federal district court.  The taxpayers didn’t hear from IRS Appeals, and the two years was expiring, so they filed their refund suit.

Refund litigation in federal district courts are handled by the Department of Justice, Tax Division. The DOJ Tax Division filed a motion for judgment on the pleadings claiming that Form 843 is the wrong form to claim a refund of income taxes and that the forms were not properly signed because they didn’t contain the IRS Form 2848. Specifically the government claimed sovereign immunity, which says that the government (i.e. the sovereign) can only be sued when it specifically authorizes the lawsuit.  26 U.S.C. §7422(a) specifically authorizes suits to recover tax refunds, but it requires that a valid tax refund was filed with the IRS.  Essentially, the government argued that it was the wrong form so they didn’t have a valid claim for refund and cannot file suit.

The court recognized that the IRS regulations do, in fact, require that income tax refunds be filed on Form 1040X and not Form 843. It also found that the signature of an authorized representative must be accompanied by a valid power of attorney (Form 2848). However, the court also noted that the Supreme Court has held that a notice fairly advising the IRS of the nature of the claim where formal defects and lack of specificity are remedied after the statute of limitations expired.  In this case, the taxpayers filed the required Form 1040X as part of the litigation to satisfy the requirements raised by the government. The court found that the taxpayers submitted valid informal claims because the IRS understood what the taxpayers were seeking and the tax years involved, even though the proper form wasn’t used. Further, the court noted that the IRS provided correspondence asking for more time to investigate the claims but not indicating any lack of understanding of the claim itself. Also, the fact that the IRS had allowed the claim for the 2008 tax year despite its filing on Form 843 indicated a willingness to grant the refund despite the lack of meeting any claimed formal requirements.

Lessons Learned

Although the taxpayers are undoubtedly grateful for the victory, I’m sure that appreciation is tempered by the costs of having to fight both the IRS and the DOJ Tax Division because of confusion over the proper Forms to use and how to fill them out. It’s a reminder that once the IRS makes its decision and, in this case, has the money it claims it is owed it will use any argument to prevent returning the money. Also, it is a reminder that technical faults claimed by the IRS can often be challenged and overcome – if necessary.