Court Rejects Taxpayer's Argument That IRS Waived Formal Refund Requirements

(Parker Tax Publishing January 2024)

A district court held that a taxpayer, a provider of hospice services, failed to satisfy the jurisdictional requirements for filing a refund action for an overpayment of payroll taxes because the taxpayer failed to request the refund from the IRS by filing a Form 941-X and did not wait six months before commencing an action as required by Code Sec. 6532(a)(1). The court rejected the taxpayer's argument that the IRS waived the administrative refund claim requirement by refunding a portion of the taxes after finding no connection between the refunds issued by the IRS and the taxpayer's submissions. Hope Hospice, Inc. v. U.S., 2023 PTC 324 (N.D. Ala. 2023).

Background

Hope Hospice, Inc. is a provider of hospice services. It did not timely report or pay its annual taxes due under the Federal Unemployment Tax Act (FUTA) for 2016, 2017, or 2018. The IRS constructed FUTA returns for those years reflecting taxes owed in an amount exceeding the amount actually owed. The IRS remedied those errors and refunded the excess FUTA taxes paid by Hope Hospice. But examination of Hope Hospice's FUTA tax liability prompted the IRS to examine Hope Hospice's tax liability under the Federal Insurance Contributions Act (FICA), and that led to a dispute that forms the basis of the present action.

Hope Hospice did report and pay its FICA taxes for each quarter of 2016, 2017, 2018, and 2019 on time. It did not report or pay FICA taxes for any quarter of 2020 because it did not have any employees during those quarters. The IRS, however, asserted Hope Hospice did not report or pay FICA taxes for certain quarters of 2016, 2017, 2018, 2019, and 2020 and constructed its own FICA returns for those quarters, reflecting taxes owed in an amount exceeding the amount reflected on Hope Hospice's returns, together with penalties and interest.

On August 16, 2021, the IRS sent Hope Hospice a notice of its intent to impose a tax levy to satisfy the tax liability reflected on the constructed FUTA returns for 2016, 2017, and 2018 and the constructed FICA returns for the first quarter of 2017 and the second quarter of 2019. But the IRS ultimately garnished Hope Hospice's Medicare reimbursements in an amount exceeding the amount stated in the notice.

The IRS began issuing refunds to Hope Hospice on February 15, 2022. Of the total amount refunded, $119,720 is attributable to the constructed FICA returns. But Hope Hospice claimed it was still owed refunds totaling $359,870 in relation to the erroneous assessment of its FICA tax liability. Hope Hospice tried to resolve its dispute with the IRS. It communicated, or attempted to communicate, with IRS agents but "encountered nothing but obstacles and delay." It contacted, or attempted to contact, local and regional IRS offices and public IRS hotlines. Hope Hospice stated that several individuals who responded were sympathetic, but none were able to help.

On November 15, 2021, Hope Hospice's CPA sent a letter to the IRS in response to notices indicating Hope Hospice had an outstanding balance in relation to its FICA taxes for the first quarter of 2017. The letter stated that Hope Hospice had reported and paid all FICA taxes owed for the quarter at issue and attached supporting evidence.

On December 14, 2021, Hope Hospice filed a Form 911, Request for Taxpayer Advocate Service Assistance. On February 11, 2022, at the recommendation of the Taxpayer Advocate Service, Hope Hospice filed FICA returns for the first quarters of 2019 and 2020, each of which reflected there was no balance due for the period. The IRS rejected those returns. It took the position Hope Hospice had to file amended FICA returns for these quarters because the returns constructed by the IRS were original returns.

Hope Hospice filed an amended FICA return on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the first quarter of 2020 on August 17, 2022. The amended return reflected there was no balance due for the quarter because Hope Hospice's FICA tax liability for the period was $0. Contemporaneously with submission of the Form 941-X, Hope Hospice's attorney sent a letter dated August 16, 2022, to the IRS, requesting a refund of excess FICA taxes assessed and paid for the first quarter of 2020. The August 17, 2022, Form 941-X was attached to the letter. On October 25, 2022, Hope Hospice filed a complaint in a district court. On March 6, 2023, Hope Hospice's attorney sent a second letter to the IRS, requesting a refund of excess FICA taxes assessed and paid for all quarters at issue. March 6, 2023, also was the date on which Hope Hospice filed an amended complaint in this action.

Two jurisdictional requirements must be met before a taxpayer may bring a lawsuit against the government for the recovery of taxes erroneously assessed or collected. First, under Code Sec. 7422(a) a taxpayer must duly file an administrative claim for a refund with the IRS before commencing an action in a district court. The form prescribed by the IRS for filing a FICA refund claim is Form 941-X. Second, Code Sec. 6532(a)(1) provides that after filing an administrative claim, a taxpayer must allow six months to elapse before commencing an action in a district court, unless the IRS renders a decision on the claim within that time.

Under Angelus Milling Co. v. C.I.R., 325 U.S. 293 (S. Ct. 1945), a waiver of the administrative refund claim requirement may occur if the IRS dispenses with the formal requirements by investigating the taxpayer's claim on the merits. A waiver need not be explicit, but it must be "unmistakable" that the IRS has in fact dispensed with its formal requirements and examined the merits of the claim.

In a motion to dismiss, the government argued that the court lacked jurisdiction because Hope Hospice failed to file a formal refund claim on Form 941-X for any quarter other than the first quarter of 2020 and that Hope Hospice failed to wait the required six months after filing that refund request before commencing this action. Hope Hospice responded that the IRS waived the administrative refund claim requirement by making refunds totaling $119,720 after Hope Hospice submitted the November 15, 2021 letter, the Form 911 Request for Taxpayer Advocate Service Assistance, and the FICA returns for the first quarters of 2019 and 2020.

Analysis

The district court granted the government's motion and dismissed the case for lack of jurisdiction. The court found that the IRS did not waive the formal requirements for an administrative refund claim by issuing refunds to Hope Hospice. The court reasoned that the connection of the refunds to Hope Hospice's submissions was conclusory and that Hope Hospice failed to allege facts suggesting the refunds were accompanied by an indication they were issued in response to its communications with the IRS.

The court found that Hope Hospice's allegation regarding the response it received from the IRS in relation to the FICA returns for the first quarters of 2019 and 2020, if anything, undercut its waiver argument. The court noted that the IRS rejected the returns, taking the position Hope Hospice had to file amended returns for these quarters because the returns constructed by the IRS were the original returns. In other words, the IRS enforced its formal claim requirements. The court concluded that there was no "unmistakable" showing the IRS chose to dispense with formal claim requirements and investigate the merits of Hope Hospice's position.

The court found that the only submission Hope Hospice made to the IRS before commencing this action that complied with all regulatory requirements for an administrative refund claim was the Form 941-X for the first quarter of 2020. And while the Form 941-X for the first quarter of 2020 complied with all regulatory requirements for an administrative refund claim, the court found that it did not satisfy the requirements of Code Sec. 6532(a)(1). Hope Hospice submitted the form to the IRS in August 2022, approximately two months before commencing this action. It did not wait the statutorily-mandated six months. The court reasoned that, even if Hope Hospice's March 6, 2023, letter could qualify as a formal claim, standing alone or as a perfection of an earlier informal claim, it did not on the facts of this case because Hope Hospice did not submit the letter to the IRS until after it had initiated this action.

For a discussion of the jurisdictional requirements for refund suits, see Parker Tax ¶261,190.

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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