Estate Administrator's Refund Lawsuit Kept Alive by IRS Processing Delays

(Parker Tax Publishing September 2023)

A district court held that a taxpayer's claim for a refund of taxes paid in years 2015 through 2018 was not barred by the three-year lookback period of Code Sec. 6511(b)(2) because the taxpayer requested the refund in 2019, which was not rejected by the IRS until 2022 after the IRS asked the taxpayer several times to resubmit documents establishing the taxpayer's entitlement to the refund. The court rejected the government's argument that the taxpayer's supplemental submissions to the IRS constituted a new refund claims and found that they were instead part of a lengthy, continuing effort to seek a refund. Myers et al. v. U.S, 2023 PTC 224 (E.D. Cal. 2023).

Background

Donna Myers did not file a tax return for 2008. In 2013, the IRS prepared a substitute return and assessed tax, interest, and penalties. In 2014, the IRS abated a portion of the penalties. However, from 2015 through Myers' death on April 21, 2018, the IRS collected $15,579 on this outstanding tax liability.

Upon Myers's death, Michael Davies was appointed administrator of her estate. On June 27, 2019, Davies requested a refund of the $15,579 Myers had paid between 2015 and 2018. He submitted numerous documents including a 2008 tax return, the court order appointing Davies as administrator, and Davies's power of attorney. Davies's request noted that because the IRS's 2013 assessment did attribute any cost basis from Myers's sale in 2008 of a residential property, it resulted in a vastly inflated tax being due. The IRS responded on August 8 by noting the 2008 return failed to include Myers's signature. On August 21, Davies re-submitted the same documents alongside Myers's death certificate demonstrating he was representing the estate. Five days later, Davies sent copies of these submissions directly to the revenue officer assigned to Myers's case.

On December 12, 2019, the IRS determined the estate was entitled to a partial refund of $10,131, noting this was the amount Myers paid within three years of Davies's summer 2019 submission. Then, on February 17, 2020, the IRS issued a notice stating Myers's estate was due a refund in the amount of $12,149 (calculating an overpayment of $15,279 plus interest owed, but less $3,386 due to Myers's tax liabilities for 2012). The notice stated that a refund check would be mailed within 2-3 weeks so long as Myers did not owe other taxes or debt. Three months later, Davies sent a letter to the IRS requesting the refund check be sent.

Almost two years later, on February 25, 2022, the IRS informed Davies that it had no record of receiving his documents for the 2008 tax year. On March 11, 2022, Davies re-sent the documents to the IRS. A few weeks later, the IRS acknowledged receipt of the Form 1040, but again appeared not to recognize Davies's authority to act on behalf of the estate. Within the month, Davies re-sent the IRS the Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, his court-appointment letter, and Myer's death certificate. Davies followed up twice more requesting the refund, to no avail.

On September 1, 2022, the IRS rejected the request for refund. On October 14, 2022, the IRS sent Davies a notice stating that it had received Myers's "amended return" on March 17, 2022, but noted it could not be processed without Myers's signature or Davies's authorization to act on behalf of Myers's estate. On November 1, 2022, Davies signed and re-sent his authorization to the IRS along with a letter and exhibits outlining the history of the dispute. Davies again requested the refund on December 16, 2022, again to no avail.

On March 8, 2023, Davies filed an action in a district court seeking a refund. The government moved to dismiss, contending that Davies's action was untimely given that the complaint was filed in 2023, Davies submitted the first refund request in June of 2019, and the statute of limitations was two years. The government further argued that the lookback provision in Code Sec. 6511(b)(2) barred any refund on Davies's March 2022 request. Under Code Sec. 6511(b)(2), the amount of a refund is generally limited to the portion of the tax paid within the three years preceding the filing of the claim. The government's main argument for dismissal was that the court should treat Davies's various submissions to the IRS as separate and distinct requests for a refund, thereby applying the statute of limitations and lookback provisions to each distinct submission.

Davies argued that his lawsuit was timely because, while he made the refund request in June 2019 (as supplemented by his resubmission of documents in the years that followed), the IRS did not reject the request until September 2022. In addition, given the IRS's September 2022 rejection applied to Davies's 2019 request, Davies contended that the lookback provisions allowed for a refund of the amounts Myers paid in the three years prior to 2019. Davies also argued for equitable estoppel, given the government's acceptance of the refund request in December of 2019.

Analysis

The district court agreed with Davies's arguments and allowed his case to go forward. The court found that Davies complied with the prerequisites to filing a refund claim and that his pleadings and supporting documents stated sufficient facts to support a cause of action for a refund under 28 U.S.C. Section 1346(a) and Code Sec. 7422(a).

The court found that Davies's refund request was not rejected until September of 2022. Under Code Sec. 6532(a), a taxpayer seeking to file a suit for refund has two years from when the IRS mailed a notice of the disallowance of the refund. Thus, the court found that Davies had two years from September 1, 2022 - the first time the IRS arguably rejected Davies's refund request - to file a lawsuit. The court also rejected the government's suggestion that Davies' submissions were distinct claims. Rather, the court said his submissions appeared to be part of a lengthy, continuing effort by Davies to seek a refund on taxes Myers paid in years 2015-2018. Thus, the court concluded that Davies's refund was not barred by the three-year lookback period in Code Sec. 6511(b)(2).

The court also allowed Davies's equitable estoppel claim to go forward. The court found that Davies's allegations presented a story of the IRS accepting his claim for refund in December of 2019, abating the substitute assessment in January of 2020, and notifying Davies in February of 2020 that a portion of the tax Myers paid would be refunded - all before inexplicably notifying Davies some two years later. The court said that these facts, coupled with the IRS's persistent delays and requests for more information, which Davies had sent multiple times prior concerning his authority to act on behalf of the estate, was sufficient to show the IRS engaged in a pattern of false promises.

However, the court found that Davies's argument failed to the extent he asked that the government be estopped from paying anything other than the amount it stated in the February 2020 notice. The court noted that the February 2020 listing the specific amount to be refunded came with the caveat that the refund check would be processed "as long as you don't owe other tax or debt we're required to collect." Thus, it was not clear to the court that the government knew the complete facts sufficient to bind it to a specific refund amount. The court went on to find, however, that if Davies' estoppel argument was limited to preventing the government from refusing to finalize his refund request as was sought in the summer of 2019, the court concurred. The court reasoned that in late 2019 to early 2020, the IRS had sufficient information to recognize that Myers overpaid on her 2008 tax liabilities, given that it issued the notice of refund in December of 2019, abated the taxes assessed from the 2014 substitute form, and issued a notice calculating an estimated refund.

For a discussion of the statute of limitations for refunds, see Parker Tax ¶261,180.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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