Refund suits: when paying and suing in District Court or the Court of Federal Claims is the better route than Tax Court

Why choose a refund forum

Publication 5 describes the Tax Court as “generally a “prepayment” forum” with limited jurisdiction. District Courts and the Court of Federal Claims hear tax cases after payment and a claim. A practitioner considers the refund route when:

• the tax is not subject to deficiency procedures, so there is no notice of deficiency to petition (for example, most employment taxes and certain assessable penalties; Publication 5 notes that some employment tax and manufacturers' excise tax cases can only be heard by these courts);
• the 90-day petition period was missed and the tax has been assessed and paid (the other route after a missed petition is audit reconsideration);
• the taxpayer prefers a court other than the Tax Court;
• the taxpayer is a nonresident alien, who may sue in the Court of Federal Claims but generally not in a District Court (Pub 5).

The trade-offs are payment up front, the Department of Justice as the opposing party, and the end of Appeals involvement once suit is filed. For the Tax Court route, see Tax Court petitions and the notice of deficiency.

The prerequisites: claim and payment

A claim must come first. IRC 7422(a): “No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected” or penalty or other sum “until a claim for refund or credit has been duly filed with the Secretary”. The claim must be timely and must set forth in detail each ground on which the refund is claimed (IRM 8.7.7.4, citing 26 CFR 301.6402-2). Draft the claim as the first pleading, because the suit is confined to it.

The variance rule. Treas. Reg. 301.6402-2(b)(1): “The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.” and “A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.” A ground first raised in court, or a new legal theory for the same dollars, is outside the claim and the government will move to dismiss it. The Supreme Court has enforced the regulation strictly. In Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945), the taxpayer argued that the Commissioner had waived the formal requirements by investigating the merits; the Court held that the Commissioner “may insist upon full compliance with his regulations” and that waiver is found only where “The showing should be unmistakable that the Commissioner has in fact been fit to dispense with his formal requirements and to examine the merits of the claim.” Do not rely on an examiner's or Appeals Officer's discussion of an unpleaded ground; amend the claim while the IRC 6511 period is open.

Informal claims. The one safety valve is the informal claim doctrine. In United States v. Kales, 314 U.S. 186 (1941), the Court treated a timely letter of protest as a claim that was later perfected by a formal claim filed after the limitations period, explaining that “a notice fairly advising the Commissioner of the nature of the taxpayer's claim, which the Commissioner could reject because too general or because it does not comply with formal requirements of the statute and regulations, will nevertheless be treated as a claim where formal defects and lack of specificity have been remedied by amendment filed after the lapse of the statutory period.” The informal claim must be in writing, must be filed within the IRC 6511 period, must identify the tax and year and tell the IRS a refund is sought, and must be perfected by a formal claim before suit. Appeals applies the doctrine administratively when time remains (IRM 8.7.7.4), but a written request that is specific about the year, the amount and the ground is the only safe practice.

Timely under IRC 6511. A claim is due within 3 years from the time the return was filed or 2 years from payment, whichever is later, and the amount recoverable is limited by the lookback rules (IRC 6511(a) and (b); IRM 8.7.7.3). These periods are not extended for hardship. In United States v. Brockamp, 519 U.S. 347 (1997), two taxpayers who filed claims years late because of senility and alcoholism asked for equitable tolling; the Supreme Court held that Congress did not intend equitable tolling to apply to section 6511, observing that “Section 6511 sets forth its time limitations in unusually emphatic form.” Congress answered in RRA 98 with IRC 6511(h), which suspends the periods in subsections (a), (b) and (c) while an individual is “financially disabled”: unable to manage financial affairs by reason of a medically determinable physical or mental impairment expected to result in death or lasting at least 12 months, proved in the form the IRS requires, and not available for any period in which a spouse or other person was authorized to act for the individual in financial matters. Outside 6511(h), a late claim is dead regardless of the reason. See refund claims for paid penalties and Form 843.

Payment. Publication 556: “Generally, the District Courts and the Court of Federal Claims hear tax cases only after you have paid the entire tax and penalties, and filed a claim for a credit or refund.” The rule is judicial. In Flora v. United States, 362 U.S. 145 (1960), the Supreme Court, on rehearing, held that 28 U.S.C. 1346(a)(1) “requires full payment of the assessment before an income tax refund suit can be maintained in a Federal District Court”, reasoning that Congress created the Tax Court as the prepayment forum and that allowing suit on part payment would let a taxpayer split a single year's tax between two courts. Flora binds every court. For divisible taxes, Publication 556 says taxpayers must pay, at a minimum, the tax attributable to one employee for one quarter and file a claim; the divisible-tax rule is the reason employment taxes, trust fund recovery penalties and most assessable penalties can be litigated without paying the whole assessment, while an income tax deficiency cannot.

The government's offset. Paying and suing reopens the whole year. In Lewis v. Reynolds, 284 U.S. 281 (1932), the Supreme Court held that in a refund suit the government may recompute the entire liability and keep the payment if the taxpayer did not overpay, even though the assessment statute has run: “Although the statute of limitations may have barred the assessment and collection of any additional sum, it does not obliterate the right of the United States to retain payments already received when they do not exceed the amount which might have been properly assessed and demanded.” The government cannot collect more than was paid on a time-barred item, but it can use any unassessed deficiency for the year to defeat the refund. Before recommending a refund suit, audit the year for exposure the examiner did not raise.

The 6-month and 2-year rules

IRC 6532(a)(1) sets both ends. Suit cannot begin until 6 months after the claim is filed, unless the IRS decides the claim sooner, and cannot begin after 2 years from the date the IRS mails a notice of disallowance by certified or registered mail. Other rules:

The reconsideration rule is the trap. “Any consideration, reconsideration, or action by the Secretary with respect to such claim following the mailing of a notice by certified mail or registered mail of disallowance shall not operate to extend the period within which suit may be begun.” Publication 5 says the same thing to taxpayers: “Appeals’ consideration of a disallowed claim doesn’t extend the 2-year period for filing suit.” Once the period runs, IRC 6514 makes any later refund erroneous, and the IRM tells Appeals to alert taxpayers that a refund is barred after the time for suit expires without a timely suit (IRM 8.7.7.2). Calendar the date from the disallowance letter, or get a Form 907 signed in time.

Tax Court and refund forums compared

Refund suits and notices of deficiency

A petition closes the refund route. If the taxpayer timely petitions the Tax Court on a notice of deficiency, no refund suit may be brought for the same tax and year, except as to overpayments the Tax Court determines and a few listed exceptions (IRC 6512(a)). The IRM puts it plainly: a timely petition precludes a later refund suit “on a claim for refund filed for the same kind of tax for the same taxable year” (IRM 8.7.7.5.3.2). Decide on the forum before the 90 days run.

A notice during a refund suit. If the IRS mails a notice of deficiency on the same tax before the refund suit is heard, the suit is stayed during the petition period and 60 days after; if a petition is filed, the refund court loses jurisdiction to whatever extent the Tax Court acquires it; if no petition is filed, the United States may counterclaim in the refund suit for the deficiency (IRC 7422(e)). Before issuing a notice on suit years, Appeals must consult DOJ through Counsel (IRM 8.7.1.8.3).

Paying after the notice. Paying the deficiency after a notice is mailed does not take away Tax Court jurisdiction if a petition is filed (IRC 6213(b)(4)), so payment alone does not commit the taxpayer to the refund route. A taxpayer who wants a refund forum lets the 90 days pass, pays the assessment, files the claim, and sues after disallowance or 6 months.

Appeals and refund claims

Before suit, a disallowed claim can be protested to Appeals under Publication 5, and Appeals applies the same hazards standard as in deficiency cases (IRM 8.7.7.5.1). If the claim is sustained as disallowed, Appeals issues Letter 1363 or 1364 unless a disallowance letter or Form 2297 already started the period, in which case it sends Letter 2681 or 2683 by regular mail. Appeals will not consider a new claim issue if the time to file a claim has expired; if time remains, it may ask for another amended return or treat the submission as an informal claim (IRM 8.7.7.4).

Once suit is filed, Appeals steps back. “The Department of Justice (DOJ) has exclusive jurisdiction over any action in which a taxpayer has filed a suit in the United States District Court or in the United States Court of Federal Claims for recovery of taxes paid.” Appeals postpones consideration of the suit years and related cases, except unrelated non-suit years with DOJ's permission (IRM 8.7.1.7). If a claim is pending without a disallowance, Appeals issues the statutory notice, closes the case to Counsel, and advises the taxpayer that no further Appeals consideration will be given (IRM 8.7.1.8.1 and 8.7.1.8.2). Settlement then runs through DOJ.

Penalties outside the deficiency procedures

Publication 5 lists what the IRS does if a taxpayer does nothing after certain proposals: for “A proposal of a trust fund recovery penalty or certain information return penalties”, the IRS will send a bill. There is no notice of deficiency, so the Tax Court route is generally unavailable for the penalty itself (CDP review aside), and the judicial forum is a refund suit after payment and a claim. For payers facing information return penalties, TIN Comply's guides on abatement requests versus refund claims and 1099 penalty court cases cover that path. For abatement before litigation, see appealing a penalty abatement denial.

Questions practitioners ask