United States

Taxpayer refund saved by informal claim doctrine

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The US District Court for the Northern District of California recently held that a taxpayer’s dispute letter to the IRS contesting an alleged underreporting of income and penalties satisfied the informal claim doctrine; and therefore, the letter constituted a timely filed refund claim. Chenette v. U.S (N.D. Cal. Oct. 16, 2019). 

The Supreme Court created the informal claim doctrine in U.S. v. Kayles, 314 U.S. 186 (1941). It allows a taxpayer to argue that a valid refund claim filed after the statutory period has run, may nonetheless be valid, if preceded by an informal claim made within the period. The doctrine is fact specific and requires the taxpayer to: (1) provide in writing, (2) a claim that puts the IRS on notice that a refund is sought and (3) describe the legal and factual basis for the claim.  

Facts

The taxpayer in Chenette (“Taxpayer”) sold stock for a loss during the 2012 tax year. In Sept. 2014, the IRS notified the Taxpayer that she underreported her income on her 2012 tax return, and demanded payment of the tax liability of approximately $18,000 plus penalties. The Taxpayer replied by a letter, dated Oct. 14, 2014, wherein she disputed the IRS allegations with a detailed analysis supporting her position, but also included a check covering the $18,000 ‘to stop the accrual of fines, interest, and penalties’.  The IRS formally assessed the alleged $18,000 deficiency on Dec. 8, 2014. The Taxpayer continued to object to the IRS assessment and on Nov. 11, 2016, she filed an amended return claiming the $18,000 refund, and providing the same analysis as contained in her Oct. 14, 2014 letter. On June 12, 2017, the IRS notified the Taxpayer that it decreased her tax liability and owed her a refund of $18,000. However, the IRS never issued a refund, and later told her that the refund claim was untimely under section 6511(a).

Claim analysis

Section 6511(a) requires that an administrative claim for refund must be filed “within three years from the time the return was filed or two years from the time the tax was paid, whichever expires later.” The IRS position thus turned on whether the $18,000 paid with the Taxpayer’s letter dated Oct. 14, 2014 was a ‘deposit’ or a ‘payment’. Though she clearly intended it to be a deposit, she did not designate it as a deposit. When a taxpayer makes an undesignated payment, the IRS can apply it in the best interest of the government. Here, the IRS argued it applied the check as ‘payment of the tax’ thus commencing the two-year statute. The IRS argued that the Nov. 11, 2018 amended return was an untimely claim, and the court was without subject matter jurisdiction and should grant the IRS motion to dismiss because under section 7422(a) a timely filed claim is a jurisdictional prerequisite. The Taxpayer argued in her opposition that the payment was a deposit and the statute had not yet commenced. The Taxpayer further argued that even if it was a payment, the Oct. 14, 2014 letter was an informal claim. Notably, the IRS did not discuss informal claim in its motion, nor did it file a reply to the Taxpayer’s opposition.  

The court decided the Taxpayer was correct that the Oct. 14, 2014 letter was a valid informal claim, formalized with the Nov. 11, 2016 amended return. It therefore did not need to address the statute of limitations issue. Here the court found the letter clearly identified the tax year at issue and contained a detailed explanation of the Taxpayer’s position as to why she did not agree with the additional tax the IRS proposed. Indeed, she even signed the informal refund claim under penalties of perjury. Furthermore, the formal refund claim, the amended Form 1040X, contained substantially the same information as the Oct. 14, 2014 letter and the IRS did not identify any deficiencies in the amended return. Thus, under the facts of this case, the court decided that the Kayles criteria were satisfied and the IRS received a writing that put it on notice of a claim for refund with a sufficient legal and factual basis. 

Conclusions

A taxpayer who wants to remit a deposit to stop interest accrual should always designate the payment as a deposit so the two-year payment statute will not begin to run. 

A taxpayer who remits an undesignated deposit that is applied as a payment, should notify the IRS in writing that the taxpayer is making a claim for refund. That document should contain sufficient legal and factual bases to support the refund claim. This includes identifying the tax year, the grounds for refund claim, the facts relied upon, and signed under penalties of perjury. If the underlying dispute is resolved years later this correspondence may constitute an informal claim. 

A taxpayer who filed a formal refund claim after the statutory refund deadline should review any prior correspondence sent to the IRS to determine if the informal claim doctrine could apply.

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