Properly navigating the IRS labyrinth of rules and regulations is difficult and sometimes taxpayers fail to dot every “i” and cross every “t”. The results can sometimes be devastating for both individuals and small businesses. Especially if the IRS chooses to assess penalties for the unknown failures and then pay those penalties from other funds the taxpayer submits through its offset power. The recent case of Special Touch Home Care Services v. United States, provides an example of how this can sometimes occur.

Background on the Case

The taxpayer in Special Touch Home Care Services had a controller, Joseph Liberman, who primarily handled taxes for the company. Mr. Liberman, unfortunately, was diagnosed with colon and prostate cancer and forced to reduce his hours. During this time, Mr. Liberman was unable to timely file all the IRS Forms W2 and W3 required. Once the company became aware of the failure, it provided the proper forms and requested an abatement of the approximately $451,000 assessed as a penalty for failing to timely file the informational returns. The taxpayers received multiple letters from the IRS that it needed more time, needed more facts, and needed specific declarations.  Meanwhile, the statutory limitations for filing a refund claim kept getting shorter..  Also, the IRS offset approximately $445,000 paid by the taxpayer for employment taxes for other tax periods to pay the disputed penalty. Never receiving a response from the IRS, the taxpayer filed suit in District Court for a refund. Unfortunately, the refund claim was filed by their attorney and the power of attorney form for that attorney did not authorize the specific refund claim form (Form 843).  Corrections were made, but only after filing a refund suit in District Court. The Department of Justice moved to dismiss the refund suit as untimely and won, denying the taxpayer the relief it sought.

Technical Compliance Requirements

Federal courts have limited jurisdiction to hear cases and the burden is on the taxpayer to show that jurisdiction exists.  In suits against the United States, the doctrine of sovereign immunity only allows the government to be sued when it consents to be sued.  In the context of tax refund suits, a taxpayer must show that a claim for refund was properly filed with the IRS and was either denied or that it has been 6 months since the filing and the IRS has provided no answer. In order to be considered proper, a refund suit must set forth sufficient facts to put the IRS on notice about the basis for the claims and regulations require the statement is made under penalties of perjury.  This is usually done through the submission of IRS Form 843 and the taxpayer in Special Touch Home Care Services submitted this form but it wasn’t signed under penalties of perjury and it was signed by the attorney who wasn’t authorized for Form 843 in the filed Power of Attorney Form (Form 2848).  The court found that the original claim, although timely filed, was not proper under the regulations.

Recognizing the potential unfairness of losing jurisdiction on a technicality regarding IRS forms, the Supreme Court and other federal courts have consistently held that an informal claim is sufficient to satisfy the statutory prerequisites to maintain jurisdiction for tax refund suits. When an informal claim is filed but contains formal defects, or insufficient specificity, it can be remedied by an amendment filed after the statutory period has expired. Therefore, the taxpayer presented a letter sent to the IRS prior to the expiration of the statute of limitations as additional support for timeliness.  Unfortunately, the letter only requested “abatement of the penalty” and not a refund and referred to the circumstances supporting the abatement generally. This problem can be corrected by a properly filed Form 843, which the taxpayer did by filing an amended Form 843 during the course of the litigation.  Unfortunately, the taxpayer ran into another problem because the original Form 843 was deficient and the amended Form 843 fixing the problems was filed after filing suit. The court held that the taxpayer’s attempts to relate its amended Form 843 to the original Form 843 filed was unsupported by the cases cited because jurisdiction must exist at the time of the filing of the complaint. Therefore, all the taxpayers attempts to fall within the required deadlines failed and the claims were dismissed.

Handling Unintended Consequences

Statutory limitations removing jurisdiction usually leave the court with no options but to dismiss the case because they no longer have the power to make a decision – equitable or otherwise. Therefore, it is imperative that taxpayers who find themselves needing to ask the IRS for refund of amounts paid, or offset by the IRS for payment, to hire a tax advisor who understands the controversy process and necessary procedures.  Otherwise, even the most meritorious of claims may never be heard by the court because of a technicality.