Refund Case Highlights IRS Tactics and Informal Claim Doctrine
Mark A. Turner
2006 - Anytime a taxpayer single-handedly takes on the IRS
and comes out the victor, it’s worth mentioning. Such
was the case in Remedios E. Ebert v. The United States
(US-CL-CT, 2005-2 USTC para. 50,495) when Ebert, a Philippines
resident and widow of a U.S. military veteran, stepped into
the U.S. Court of Federal Claims in pursuit of a tax refund.
The case is a reminder that the little guy can win, and it
offers instructive lessons to taxpayers on tactics the IRS
may employ to oppose taxpayer refund claims. The case also
provides an opportunity to consider both the formal refund
claim requirements and the judiciary’s informal refund
issue in Ebert was whether the taxpayer was entitled
to a refund for taxes paid on survivor benefit payments
(SBP) that were retroactively converted to dependency and
indemnity compensation benefits (DIC). The former is taxable
income while the latter is not—a fact about which
there was no disagreement. The IRS, however, denied the
refund for the following reasons:
The taxpayer failed to satisfy the requirements for a
Payments received under the SBP program are “closed
transactions” and cannot be later recharacterized
for tax purposes.
The taxpayer failed to prove she was not already reimbursed
for the taxes paid under the SBP program.
An unpublished disposition of a similar case was decided
in favor of the IRS.
Refund Claim Requirements
mid-2001, Ebert, a nonresident alien residing in the Philippines,
received notice from the U.S. Department of Veterans Affairs
(DVA) that she was entitled to DIC payments, retroactive
to 1999. The SBP payments were thus discontinued at that
point and the larger, nontaxable DIC benefit began, retroactive
to February 1999. Ebert then wrote the IRS requesting a
refund for 1999, 2000, and 2001. The letter was accompanied
by Form 1042-S (Foreign Person’s U.S. Source Income
Subject to Withholding), which detailed her gross income
and the amount of U.S. tax withheld. The total refund requested
was $4,887, plus interest. In a motion for summary judgment,
the IRS contended that Ebert had not satisfied the requirements
for a tax refund claim.
taxpayer bears the burden of proving entitlement to a refund.
That burden must meet the requirements of Treasury Regulations
section 301.6402-2(b). In theory, the claim “must
set forth in detail each ground upon which a credit or refund
is claimed and facts must be verified by a written declaration
that it is made under the penalties of perjury.” Timely
submission of an appropriate claim form is required to obtain
a refund. IRC section 6511 requires that requests be within
three years from the time the return was filed or two years
from the time the tax was paid, whichever is later. The
limit is two years from the time the tax was paid if no
return was filed.
taxpayers claim refunds on tax returns when originally filed.
For those who first filed Form 1040, 1040A, or 1040EZ, subsequent
refund claims must be made on Form 1040X, as required by
Treasury Regulations section 301.6402-3(a)(2). This procedure
will meet the requirements of IRC section 6402 (which authorizes
the Treasury Department to issue refunds, subject to other
liabilities that might be owed to other federal agencies).
Taxpayers who elect to have overpayments refunded may not
thereafter change the election to have the overpayment applied
as a payment of estimated income tax.
respect to nonresident aliens such as Ebert, the tax return
must contain the tax identification number and the entire
amount of income subject to tax, “even if the tax
liability for that income was fully satisfied at the source
through withholding under chapter 3 of the Internal Revenue
Code” [Treasury Regulations section 301.6402-3(e)].
A copy of Form 1042-S must be attached to the return. Nonresident
aliens may not claim refunds if the withholding agent has
already reimbursed them. Treasury Regulations section 1.1461-2
sets forth the procedure to ensure that the IRS is informed
of any such reimbursement.
taxpayers who have agreed to an overassessment of tax as
determined by the IRS, a timely filed Form 870 or Form 890
is considered a valid refund claim. Grounds for the overassessment
are considered the basis for the claim.
claims are filed with the IRS service center for the district
in which the tax is paid. For tax paid to the Director of
International Operations, the refund claim, along with supporting
evidence, is filed with the director. For taxpayers who
successfully prevail in court, the Justice Department issues
documents to the IRS authorizing a refund.
Refund Claim Doctrine Requirements
practice, the courts have not adhered to such a rigorous
standard, but have developed their own “informal refund
claim” standard. This doctrine originated with the
Supreme Court’s ruling in U.S. v. Kales
(41-2 USTC para. 9785), which recognized a taxpayer’s
right to claim a refund based upon an informal claim. In
this case, the taxpayer paid a tax assessment, within the
statutory period for filing a refund claim, and included
a letter protesting the assessment. The letter asserted
that if the value of stock sold (which gave rise to the
income recognized) were to be revalued upward she would
“claim a right to a refund.” When the stock
was in fact later revalued, she claimed her refund. The
Supreme Court recognized this informal claim entitling her
to file suit in pursuit of her refund claim outside the
judicial doctrine requires that the taxpayer adequately
apprise the IRS that a refund is sought for certain years.
More specifically, an informal refund claim must do the
Provide the IRS with notice that the taxpayer is asserting
a right to a refund,
the legal and factual basis for the refund, and
a written component.
written component need not encompass the taxpayer’s
entire case. In addition, the written component can include
oral statements of the taxpayer documented in written form
by IRS personnel, and may precede the actual assessment
of a tax [New England Electric System and Subsidiary
Companies v. U.S. (95-1 USTC para. 50,069)]. The U.S.
Court of Claims in New England Electric System noted:
court must examine the facts and circumstances to discern
whether the total mix of the written component and the
particular facts indicate that the IRS knew or should
have known that the taxpayer was asserting a right to
court has consistently ruled that submission of Form 1045
does not constitute a refund claim, formal or informal.
At best, “it informs the Commissioner of the possibility
that petitioners have one or more claims for a refund. The
form does not, however, assert the right to any refund,
nor does it provide the legal or factual basis for any refund”
[Larry J. Sumrall and Patricial A. Sumrall v. Commissioner,
CCH Dec. 54,694(M)]. In contrast, Form 4868 (Application
for Automatic Extension of Time to File U.S. Individual
Income Tax Return) does constitute an informal refund claim,
under the following circumstance: The taxpayer has made
a designation on the form that the tax credit at issue is
to be applied to another year’s tax liability. That
is deemed sufficient to put the IRS on notice that the taxpayer
was claiming a refund [E.J. Kaffenberger v. U.S.
(2003-1 USTC para. 50,164) and AOD 2004-04].
Kidde Industries, Inc. v. U.S. (98-1 USTC para.
50,162), the court determined that an informal claim need
not be directed to the IRS official who will consider the
claim. Rather, it is sufficient to direct the informal claim
to those with sufficient related responsibilities to put
the IRS on notice of the pertinent claim.
informal claim doctrine as described in Ebert is
most certainly a facts-and-circumstances doctrine:
relevant inquiry is whether the claim is sufficient to
notify the IRS that the party is asserting a right to
a tax refund, and to enable the IRS to begin an examination
of the claim. A plaintiff claiming a tax refund must prove
her case by a preponderance of the evidence.
Ebert, the court decided she had met the burden
of proof. Ebert provided the IRS with a written request
for a refund for each of the three years. She apprised the
IRS of the factual and legal basis for the claim by stating
that a refund was due as a result of the retroactive conversion
of SBP payments into DIC payments. She also provided copies
of Form 1040-S to substantiate the amount of the refund
Informal Claim Doctrine in Tax Planning
Sullivan v. U.S. (2000-1 USTC para. 50,402), the
court suggested a tax planning opportunity for those who
find themselves in Ebert’s shoes. That is, Sullivan
might have made an informal refund claim for the retirement
income that potentially could be retroactively recharacterized
as disability income. The court stated the following:
each instance when the Sullivans were filing tax returns
and taking deductions for less than the 100 percent disability
they felt Mr. Sullivan merited, plaintiffs could have
announced their intention to claim a greater exemption
in the future, transforming the joint returns also into
protective assertions of present rights, should the amounts
of the forward-looking claim become a reality.
strategy can be taken too far. When refund claims are made,
the taxpayer should establish the grounds for the refund.
While the terms may be general, they cannot be indefinite.
Comments like “the income items reported are not in
fact income” are not sufficient without additional
explanation. “Protective clauses” intended to
permit the taxpayer to amend the claim with additional detail
after expiration of the limitation period will not qualify.
of cases involving informal refund claims suggests a wide
array of ways to meet the described requirements. This issue
most often arises, however, when taxpayers wish to sue the
IRS for a refund but have failed to make a formal refund
request as described in Treasury Regulations section 301.6402-2.
IRC section 7422(a) requires that in order to bring suit
in court for the recovery of any internal revenue tax, a
claim for a refund must have been filed timely with the
Treasury Secretary, as required by law. In many cases, this
formality has not occurred; hence, the courts have derived
the “informal claim doctrine.” If such an informal
claim occurred during the period of limitation, a suit can
be filed and a refund might still be forthcoming. Absent
a formal or informal claim, no suit may be filed.
second argument offered by the IRS in denying Ebert’s
refund claim was that the transactions were closed. In order
to assess the tax effect of any transaction, it must be
completed. For example, where property is sold subject to
nonquantifiable subsequent events, no value can be placed
on the transaction, and the tax impact must await the outcome
of those events. The IRS argued that agreeing to Ebert’s
refund claim would require a recharacterization of income
previously realized and recognized. Closed transactions
cannot be retroactively reclassified “if the transaction
was unambiguous in character at the time it took place.”
For Ebert, her SBP payments were unambiguously taxable and
thus closed. Any subsequent conversion of those benefits
into DIC payments (nontaxable) would not alter the previous
the IRS position makes sense. Absent this principle, taxpayers
with the benefit of 20/20 hindsight could attempt to recharacterize
past transactions in order to obtain tax advantages. For
example, what if a taxpayer’s closely held corporation
relabeled last year’s salary as a dividend so as to
enable a carryback of this year’s net operating losses?
Permitting recharacterization of closed transactions would
create an unwieldy administrative burden for the IRS.
of Ebert’s request to recharacterize the taxable SBP
payments as nontaxable DIC payments suggests a broader question:
What can be altered on tax returns within the three-year
period of limitation? Generally,
refund claims fall into one of three categories:
Amounts paid exceed the amount of correct tax,
Mistakes are discovered on a return, or
is important that the grounds for any refund claim be clearly
described. They may be stated in general terms but cannot
be indefinite. A timely filed claim can be amended prior
to expiration of the period of limitation. Subsequent amendments
are permitted to clarify or modify grounds already identified,
but no new grounds can be claimed after the limitation period.
refund claim was not due to a mistake, as the return was
correct at the time of filing. Additionally, no carrybacks
were claimed. The grounds for refund were based upon the
fact that the amounts paid were in excess of the correct
tax. The original tax computation was incorrect because
SBP payments became DIC payments. Is this the same as a
taxpayer’s recharacterizing previously claimed salary
as dividend income when his controlled corporation decided
to change the nature of the distribution?
distinguishing fact in Ebert’s case hinges upon a
nontax statutory authority to convert, retroactively, SBP
payments to DIC payments. The
right to receive nontaxable Veteran’s Administration
(VA) disability benefits (DIC) rather than the already awarded
taxable retirement benefits (SBP) is conditioned upon filing
VA Form 21-651, which waives the right to the retirement
pay to the extent of any disability pay, thus preventing
double benefits to the same individual. Any award granted
is effective upon the date of the application rather than
upon waiver of the retirement income (38 USC section 5110).
This factor contemplates retroactive effectiveness.
effective date for excluding this award is date of application
rather than date of approval by the VA. In Stickland
v. Comm’r (76-1 USTC para. 9291), the court found
that a retired Army colonel, who filed the VA 21-651 and
then had retirement pay converted to disability pay as of
the date of that filing, “cannot be charged with the
eleven month delay” from time of filing to date of
approval. “He had done all he could do and all the
Veterans Administration required him to do.”
reclassification in such cases, however, does not extend
beyond the three-year period of limitation. In Sullivan,
100% of a retired Navy captain’s retirement pay was
retroactively converted to disability pay. Refund claims
associated with reported income outside the three-year window
were not allowed. “The government’s delay in
making its disability determination did not equitably estop
the IRS from denying the refund because the limitations
periods were not affected by equitable considerations.”
outcome for the taxpayer in Ebert would not necessarily
mean open season for “closed transactions.”
The factor that distinguishes this case from other attempts
to reclassify completed transactions is the fact that recharacterization
was controlled by a third party. Ebert did not employ hindsight
to alter the nature of a past transaction, as contemplated
in the hypothetical example above. Control by a statutory
authority can effect a retroactive reclassification.
That the Taxes Are Not Already Refunded
its third argument, the IRS contended that Ebert had not
shown that the DIC payments had not effectively reimbursed
her for the tax withheld under the SBP program. The court
did not accept this argument, stating that Ebert had met
her burden by presenting documentary evidence of the facts,
undisputed by the IRS. Moreover, it is well within the power
of the government to produce documentation evidencing that
the DIC payments effectively reimbursed her for the tax
withheld. In a footnote, the court cited 28 U.S.C section
520(a), which states:
suits against the United States in the United States Court
of Federal Claims … founded on a … transaction
with an executive department or military department …
the Attorney General shall send to the department …
a printed copy of the petition filed by the claimant,
with a request that the department … furnish to
the Attorney General all facts, circumstances, and evidence
concerning the claim in the possession or knowledge of
“vague assertions regarding purported deficiencies
in the movant’s case are not sufficient to create
an issue of fact.”
a Prior Pro Se Case Control?
IRS’s final argument for denying the refund claim
recommended that the court follow the decision in an unpublished
related case. In Caba v. U.S. (2001-1 USTC para.
50,406), the taxpayer claimed a refund was due with respect
to SBP payments that were converted into DIC payments. This
case, however, differed from Ebert in one salient
respect: The VA decision to convert the payment occurred
after the taxpayer filed her complaint. Under the
“substantial variance rule,” taxpayers are barred
from presenting in a tax refund suit claims that “substantially
vary the legal theories and factual bases set forth in the
tax refund claim presented to the IRS” (Lockheed
Martin Corp. v. United States, 2001-1 USTC para. 50,401).
Furthermore, under the rule, “a ground for a refund
that is neither specifically raised by a timely claim for
a refund, nor comprised within the general language of the
claim, cannot be considered by a court in a subsequent suit
for a refund” (Ottawa Silica Co. v. United States,
83-1 USTC para. 9169).
provides some insight into how the IRS can dispute a refund
claim. The first thing the IRS did was attempt to discredit
the claim on the basis that all technical requirements were
not met. Tax preparers are cautioned to “cross all
the t’s and dot all the i’s” when requesting
taxpayer refunds, especially if the refund may be challenged
by the IRS. It is highly unlikely the IRS would employ the
judiciary’s informal claim doctrine to circumvent
formal refund requirements.
when past transactions are recharacterized, expect the IRS
to challenge the refund claims on the basis of the transactions
being closed, even if they are within the limitation period.
the IRS may expect taxpayers to bear the burden for proving
that the refund has not already been realized, even though
that information is already available to the IRS. This seems
to be a particularly disingenuous tactic to derail refund
in Ebert, the IRS offered support for its position
in the form of cases that followed a similar but not identical
fact pattern. It is not clear whether this was a deliberate
attempt to undercut the refund claim or simply the result
of poor research.
Standards for Pro Se Plaintiffs
“level the playing field” for taxpayers pleading
their own cases, the courts are more forgiving of improper
procedure than might be allowed for members of the legal
profession, who should know better. For example, in Haines
v. Kerner et al. (404 U.S. 519), an inmate alleged
he suffered injury during disciplinary confinement. Both
the district and appeals courts dismissed his case because
the inmate failed to state a claim upon which relief could
be granted. The Supreme Court reversed, ruling that the
inmate’s pro se petition though “inartfully
pleaded” should be held “to less stringent standards
than formal pleadings drafted by lawyers.” As noted
in Conley et al v. Gibson et al (355 U.S. 41),
the Federal Rules of Civil Procedure “reject the approach
that pleading is a game of skill in which one misstep by
counsel may be decisive to the outcome and accept the principle
that the purpose of pleading is to facilitate a proper decision
on the merits.” This leniency applies to attorneys
and nonattorneys alike, with a focus on arriving at a just
outcome. Rule 1 of the Federal Rules of Civil Procedure
provides that all the rules “be construed and administered
to secure the just, speedy, and inexpensive determination
of every action.”
pro se complaint was held to this lower standard
in the interest of fairness, however “inartfully pleaded.”
It is not uncommon for taxpayers to argue their own case,
and a variety of websites and books exist that instruct
individuals on how to do so.
for Taxpayers and Preparers
the interesting nature of this pro-taxpayer pro se
decision, Ebert also provides an opportunity to
consider both formal refund claim requirements and the judiciary’s
informal claims doctrine. Tax practitioners should be aware
of the informal claims doctrine when concerned about meeting
the statue-of-limitation requirements for filing refunds.
A few fairly simple actions on the part of a tax preparer
can preserve a future opportunity to pursue a refund.
Ebert provides insight into IRS tactics in challenging
taxpayer refund claims. It is surprising how easily the
court dismissed each IRS argument to rule in favor of the
taxpayer. It is equally surprising that this case found
its way to court, given the seeming weakness of the IRS’s
arguments and the relatively small amount of money involved.
A. Turner, DBA, CMA, CPA, is an associate professor,
Texas State University–San Marcos, San Marcos, Texas.