If the Social Security Administration determines that you are disabled, does the IRS have to accept that determination for tax purposes? It is one government is it not? The court considered this in Gentry v. United States, No. 3:18-cv-00581 (D. Nev. 2019) for the disability exception allowing for a longer period of time to file refund claims with the IRS.
Facts & Procedural History
The taxpayer-husband became disabled in March of 2013. The taxpayer-husband took an early distribution from his retirement account due to his disability.
He filed his taxes for 2013 in 2014. He was waiting for a Social Security hearing on whether he was disabled at the time. The hearing wasn’t held until 2016. After the hearing, he received a disability award in October of 2016. The IRS lien for unpaid taxes from 2013 was satisfied out of this award payment he received in 2016.
The taxpayer filed a refund claim in August of 2018 to recoup the tax payments he had made previously. The IRS argued that the refund claim was not timely filed. This was the question for the court, was the refund claim was timely filed?
The Timing Rules for Refund Claims
Generally, a taxpayer has to the later of either (1) three years from the time a tax return was filed or (2) two years from the date a tax is paid to file a refund claim to recoup the overpayment.
The three year rule didn’t apply in this case. The tax return was filed in 2014 and the refund claim was filed in 2018. The court focused on the two year rule.
There are several rules for when taxes are deemed to be paid. For example, taxes that are withheld from a taxpayer’s paycheck by an employer are deemed to be paid to the IRS on the due date of the tax return that reports the wages as income. In this case, that would be April of 2014–for taxes withheld by the employer for 2013.
Another rule applies to voluntary payments made directly to the IRS. The same rule applies for involuntary payments, such as IRS levies or seizures. These payments are generally deemed to be paid when the funds are received by the IRS.
Here, the taxpayer made a payment just outside of the two year window and the IRS levy was remitted just prior to the close of the two year window. The result is that the voluntary payment could not be recovered from the IRS, but the IRS levy funds could.
The court did not grant the refund request as the taxpayers were incorrect on the underlying law. They were not entitled to the refund. But before reaching this issue, the court also considered the taxpayer’s argument that the refund claim period was still open.
The Financial Disability Exception
The taxpayers argued that the refund statute was still open as the taxpayer-husband was disabled. There is an exception for financial disability. It is found in Sec. 6511(h), which defines the term “financial disability” as follows:
an individual is financially disabled if such individual is unable to manage his financial affairs by reason of a medically determinable physical or mental impairment of the individual which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to have such an impairment unless proof of the existence thereof is furnished in such form and manner as the Secretary may require.
The IRS has published guidance that suggests that this is met by providing a letter noting the disability from a medical doctor.
Establishing Financial Disability
The court opinion notes that the taxpayer-husband was determined to be disabled by the Social Security Administration. One might think this was sufficient to establish financial disability for tax purposes.
The court concluded that “just because Plaintiffs may be disabled under the criteria set forth by other agencies, they are not necessarily economically disabled….” It also noted that the taxpayers did not provide sufficient information to the “IRS’s sanctification.” Thus, the court essentially deferred to the IRS in determining whether the taxpayer was financially disabled.
The takeaway is that the taxpayer who is disabled has to do more than rely on the fact that the Social Security Administration determined that they were disabled. There are several things they can do in this regard. one is that they can obtain letters from their doctors, which reach this conclusion. If in court, if the court allows it, they should also be able to present testimony that reaches this conclusion.
It should be noted that this is not just important for the time period for filing a refund claim. It is also important for avoiding the early withdraw penalty for retirement accounts. Documentation can help avoid this tax penalty.