houston tax attorney informal reund claim

Taxpayers have a limited time to file refund claims to recoup money from the IRS.  The IRS provides tax forms to be used for making these requests.  But what happens if the If the taxpayer does not use the forms the IRS provided and, instead, writes letters to the IRS?  Can the letters count as a valid refund claim?  This fact pattern was considered in the Schwartz v. Commissioner, T.C. Memo. 2019-162 case.

Facts & Procedural History

In 2006, the taxpayer remitted $150,000 to the IRS as an estimated payment for 2005.  The divorce court entered an order saying that the taxpayer could not use the $150,000 payment.  The taxpayer thought this order meant that he could not file Federal income tax returns as it would have used the payment.  The divorce proceedings didn’t conclude until 2011.

If the taxpayer had filed tax returns for 2005 or later years, the $150,000 amount would have been applied to his tax liabilities.  Thus, the $150,000 would have been used in violation of the divorce court’s order.  The taxpayer concluded that the divorce court’s order prevented him from filing tax returns for these years.

Because he could not file tax returns, the taxpayer wrote letters to the IRS which apparently asked that the $150,000 be refunded to him.  These letters were sent to the IRS in 2008.  Perhaps the hope was that the IRS would read the letters and appear to act on its own, so the taxpayer would not have violated the divorce court’s order.

On audit, the IRS refused to issue a refund for 2005.  It concluded that a refund claim was not timely filed.  During the tax litigation, the taxpayer argued that his 2008 letters counted as an informal refund claim and that this refund claim was timely.

Informal Refund Claims

Taxpayers generally have to file refund claims using the IRS’s prescribed forms.  But this is not always the case.  The informal refund claim doctrine is an exception.  This exception counts letters, such as the letters in this case, as a tax return.

To be an informal refund claim, there must first be a refund claim.  The regulations say that a refund claim is a document that:

  1. Sets forth in detail each ground upon which the refund is claimed and facts sufficient to apprise the IRS of their exact basis,
  2. Is verified by a written declaration made under penalties of perjury,
  3. Is submitted on the appropriate form,
  4. Is filed with the service center serving the district in which the tax was paid, and
  5. In the case of income, gift, and unemployment taxes, is filed as a separate claim for each type of tax for each tax period.

These are foundation requirements that must be met.  To be an informal refund claim, the claim must also:

  1. Be in writing and delivered to the IRS before the expiration of the applicable period of limitation,
  2. Adequately notify the IRS that the taxpayer is claiming a refund and the basis for it, and
  3. The taxpayer must perfects the informal refund claim by filing a formal refund claim before the IRS rejects the informal refund claim.

If these rules have been created by the courts.  Thus, it is often necessary to hire a tax attorney to raise the issue.

Are Letters to the IRS an Informal Refund Claim?

The informal refund claims in this case include two letters the taxpayer sent to the IRS and the IRS’s response letters.  The court describes these letters as follows:

At trial petitioner proffered a letter he wrote to the IRS dated March 28, 2008. According to petitioner, this letter and other communications with the IRS constitute a timely informal claim for refund. Petitioner also proffered two letters from the IRS dated May 7 and August 7, 2008, both of which acknowledge correspondence “received” April 10, 2008. The May 7, 2008, letter advises petitioner: “[W]e [the IRS] haven’t resolved this matter because we haven’t completed all the research necessary for a complete response” and “[y]ou [petitioner] don’t need to do anything further now on this matter.” The August 7, 2008, letter is substantially similar, advising petitioner: “[W]e have not yet completed our research to resolve your inquiry.”

Given that this case was before the court as a collection case, the court remanded the case back to the IRS Office of Appeals to determine whether these letters qualify as informal refund claims.  If they do, the taxpayer will likely be able to recoup his 2005 payment.

The taxpayer may also have a basis for arguing that the failure to file penalty does not apply.

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