Taxpayer Wins Refund Despite Using Wrong Form

Let’s look at a case that comes out of Cincinnati.

E. John Rewwer (Rewwer) had a professional practice which he reported on Schedule C (proprietorship/disregarded entity) of his personal return.

He got audited for years 2007 through 2009.

The IRS disallowed expenses and assessed the following in taxes, interest and penalties:

           2007            $  15,041

           2008            $137,718

           2009            $ 55,299

Rewwer paid the assessments.

He then filed a claim for refund for those years. More specifically his attorney filed and signed the refund claims, including the following explanation:

The IRS did not properly consider documentation of my expenses during my income tax audit. I would ask that the IRS reopen the audit, reconsider my documentation, and refund the amounts paid as a result of the erroneous audit adjustments, including any penalty and interest that may have accrued.”

I am not certain which expense categories the IRS denied, but I get it. I have a similar (enough) client who got audited for 2016. IRS Holtsville disallowed virtually every significant expense despite being provided a phonebook of Excel schedules, receipts and other documentation.  We took the matter to Appeals and then to Tax Court. I could see some expenses being disallowed (for example, travel and entertainment expenses are notoriously difficult to document), but not entire categories of expenses. That told me loud and clear that someone at IRS Holtsville could care less about doing their job properly.

Wouldn’t you know that our client is being examined again for 2018? Despite taking the better part of a day faxing audit documentation to IRS Holtsville, we are back in Tax Court.  And I feel the same way about 2018 as I did about 2016: someone at the IRS has been assigned work above their skill level.

Back to Rewwer.

The attorney:

(1)  Sent in claims for refund on Form 843, and

(2)  Signed the claims for refunds.

Let’s take these points in reverse order.

An attorney or CPA cannot sign a return for you without having a power of attorney accompanying the claim. Our standard powers here at Galactic Command, for example, do not authorize me/us to sign returns for a client. We would have to customize the power to permit such authority, and I will rarely agree to do so. The last time I remember doing this was for nonresident clients with U.S. filing requirements. Mail time to and from could approach the ridiculous, and some of the international forms are not cleared for electronic filing.

Rewwer’s claims were not valid until the signature and/or power of attorney matter was resolved.

Look at this Code section for the second point:

§ 301.6402-3 Special rules applicable to income tax.

(a) The following rules apply to a claim for credit or refund of income tax: -

(1) In general, in the case of an overpayment of income taxes, a claim for credit or refund of such overpayment shall be made on the appropriate income tax return.

(2) In the case of an overpayment of income taxes for a taxable year of an individual for which a Form 1040 or 1040A has been filed, a claim for refund shall be made on Form 1040X (“Amended U.S. Individual Income Tax Return”).

Yep, there is actually a Code section for which form one is supposed to use. The attorney used the wrong form.

For some reason, the IRS allowed 2008 but denied the other two years.

The IRS delayed for a couple of years. The attorney, realizing that the statute of limitations was about to expire, filed suit.

This presented a window to correct the signature/power of attorney issue as part of the trial process.

To which the IRS cried foul: the taxpayer had not filed a valid refund claim (i.e., wrong form), so the claim was invalid and could not be later perfected. Without a valid claim, the IRS claimed sovereign immunity (the king cannot be sued without agreement and the king did not so agree).

The IRS had a point.

But the taxpayer argued that he had met the “informal claim” requirements and should be allowed to perfect his claim.

The Supreme Court has allowed imperfect claims to be treated as informal claims when:

(1) The claim is written

(2)  The claim adequately tells the IRS why a refund is sought, and

(3)  The claim adequately tells the IRS for what year(s) the claim is sought.

The point to an informal claim is that technical deficiencies with the claim can be remedied – even after the normal statute of limitations - as long as the informal claim is filed before the statute expires.

As part of the litigation, Rewwer refiled years 2007 and 2009 on Forms 1040X, as the Regulations require. This also provided opportunity to sign the returns (and power of attorney, for that matter), thereby perfecting the earlier-filed claims.

Question: did the Court accept Rewwer’s informal claim argument?

Answer: the Court did.

OBSERVATION: How did the Court skip over the fact that the claims – informal or not – were not properly signed? The IRS did that to itself. At no time did the IRS deny the claims for of lack of signatures or an incomplete power of attorney. The Court refused to allow the IRS to raise this argument after-the-fact to the taxpayer’s disadvantage: a legal principle referred to as “estoppel.”  

Look however at the work it took to get the IRS to consider/reconsider Rewwer’s exam documentation for 2007 and 2009. Seems excessive, I think.

Our case this time was E. John Rewwer v United States, U.S. District Court, S.D. Ohio. 

COMMENT: If you are wondering why the “United States” rather than the usual “Commissioner, IRS,” the reason is that tax refund litigation in federal district courts is handled by the Tax Division of the Department of Justice.