Steps to Take Before Suing the IRS for a Tax Refund

tax return written in spiral notebook on office desk, flat lay composition

When the IRS makes a mistake, individuals and small businesses often want it corrected in a hurry. They may rush to file a lawsuit to correct the error. But if you miss certain steps before suing the IRS for a tax refund, your case could be dismissed, forcing you to start over or lose your opportunity to sue entirely.

Court Dismisses Tax Refund Lawsuit Over Missing Pre-Litigation Forms

Recently, the United States District Court for the Eastern District of NewYork issued a Memorandum and Order in Special Touch Home Care Services, Inc v United States of America. The Court dismissed the taxpayer’s lawsuit suing the IRS for a tax refund based on missing pieces in the company’s efforts to obtain relief before filing its complaint. Following along with this case shows just how important it is for taxpayers and the accountants and tax attorneys who represent them to pay close attention to the details in tax appeals procedure.

Special Touch Home Care Services, a New York business, relied on the same controller, Joseph Lieberman for years. Between 1990 and 2014 he filed the company’s taxes each year without incident. Then in late 2015, Mr. Liberman became seriously ill. Because of this, Mr. Liberman failed to file Plaintiff’s W-2 and W-3 forms for 2015 and 2016.

The IRS imposed a penalty on July 31, 2017, which was the first the business owner learned of the problem. The company promptly filed the missing tax forms. On November 10, 2017, the company requested an abatement of the penalty, but the IRS denied that request on February 2, 2018, because the company’s request had not shown reasonable cause or due diligence. On February 19, 2018, the IRS assessed a penalty of $451,000.

Step 1: Pay First, Sue Second

This blog has previously addressed the need for taxpayers suing the IRS for a tax refund or improper penalty to pay the full amount of the assessed tax or penalty first and then sue for a refund of the improperly assessed amount. Here, the IRS offset the penalty from the company’s employment taxes in 2018, resulting in a full payment on July 31, 2018.

Step 2: When Working with a Tax Preparer, Complete a Power of Attorney

Any time a taxpayer works with a professional to prepare a tax return or negotiate with the IRS, they must provide specific authorization to that professional by filing a Power of Attorney (Form 2848). Special Touch Health Care hired an attorney to help them get a refund of the penalty amount. The attorney filed a Power of Attorney, but it did not specifically authorize the attorney to represent the company with respect to their Claim for Refund, to sign forms on their behalf, or to file tax returns on their behalf.

Step 3: Submit a Signed Claim for Refund

Special Touch’s attorney filed a Claim for Refund and Request for Abatement (Form 843) with the IRS on July 1, 2019. She signed this form as the company’s “return preparer” in the section designated “Paid Preparer Use Only.” However, this section did not state that the form was accurate “under penalties of perjury.” On December 18, 2019 and February 12, 2020, the IRS notified the company that they had not “completed all the processing necessary for a complete response.” However, the attorney did not send any additional documents or information to the IRS before suing the IRS for a tax refund.

In court, the IRS filed a motion to dismiss the company’s lawsuit, claiming that sovereign immunity meant that the court did not have subject matter jurisdiction over the case. “Sovereign immunity” means that a person cannot sue the government unless their claims fit into specific laws where the government has agreed to be sued. This includes laws that allow taxpayers to bring tax refund lawsuits. However, it is up to the taxpayer to make sure they have met the requirements for filing such a suit. The Court’s ruling said this included the requirement that any Claim for Refund be signed “under penalty of perjury.” Since the attorney’s signature was unverified, the Court dismissed the company’s lawsuit.

Step 4: Wait 6 Months Before Suing the IRS for a Tax Refund

The company’s attorney tried to fix her mistake by filing a new Form 843 in December 2020, five months after suing the IRS for a tax refund. However, the same rules that require a Claim for Refund to be verified say that a taxpayer must wait 6 months after filing that claim before taking the matter to court. This allows the IRS to investigate the claim and respond to the request. The attorney could not retroactively fix the error in her Claim for Refund because when she filed the company’s lawsuit, it took the case out of the IRS’s jurisdiction. Without that signature, the Court didn’t have subject matter jurisdiction either, so the case had to be dismissed.

Options if You Miss a Step

As this case shows, technical errors in tax cases can have serious consequences. The law does provide a couple of options to continue your lawsuit if you miss a step.

Informal Claim Doctrine

The “informal claim doctrine” says that if a taxpayer provided the IRS fair notice of the nature of their claim, which the IRS rejects as too general or not complying with some formality, it can still be treated as a claim if the taxpayer fixes the defects after the fact. Essentially, the informal claim doctrine pauses the timer on requests for tax refunds, giving the taxpayer extra time to work through the steps.

Here, the company never corrected its error before suing the IRS for a tax refund. The letter the company sent to the IRS in November 2017 was too general and did not explain the reason why the penalties should be removed. In addition, this letter requested an abatement of the unpaid penalty (see Step 1), not a refund of the paid amount. Since the attorney never corrected the Claim for Refund before filing her complaint in federal court, the informal claim doctrine did not apply.

“Relation Back” Theories

Every tax lawsuit (in fact, every lawsuit) must be filed within a specific period of time. Later amendments to your complaint can still be considered timely if they are close enough to the original basis for the complaint, so that the IRS would be on notice of the related claim. In these cases the amended claims “relate back” to the first complaint, so the IRS cannot say that the new claim violated the statute of limitations.

However, relation back theories can’t save a case where the original claim was invalid. Because the Court had decided that the Claim for Refund was not “duly filed” with the IRS, there was nothing for any later amendments to relate back to.

Special Touch Home Care Services vs US shows just how important it is to work with experienced professions with an eye for detail. Because of its attorney’s errors, the company now must go back to the beginning and start again. If you are considering suing the IRS for a tax refund, make sure to work with a tax lawyer who will file the forms correctly the first time. Otherwise, you may face a motion to dismiss your case.