I am thinking she got hosed.
I am looking at a district court decision. It involves
Michelle Moy, and it remarkably bridges 2011 to the 2020 COVID year.
Let’s talk about it.
In May 2011 Moy was assessed $32,507 by the IRS
because she failed to file a 2008 tax return. In this situation, the IRS may
prepare a return for you (called a substitute for return) and proceed
accordingly with collections activity.
COMMENT: It is rare that a substitute for return (SFR) will be to your advantage. The IRS will throw in all the positive numbers it can find, but it will not include negative numbers with the same zeal. It is almost always to your advantage to file a return rather than accept an SFR.
QUESTION: Here is an obscure practice question: when you file the 2008 return with an SFR already on file, is it considered an amended return? The answer is below.
Turns out that Moy had $20,447 in 2008 U.K. foreign
taxes available for credit. Assuming that the foreign tax credit was available
dollar-for-dollar, Moy owed $12 grand rather than the $32 grand the IRS wanted.
Seems easy enough. File the return. Pay the $12 grand
plus interest and penalties and move on.
It appears Moy instead paid the $32 grand. She did not
realize and overpaid.
I say that because she filed a claim for refund in
April 2018. I presume the claim was for the $20 grand of foreign taxes.
In August 2018, the IRS bounced the claim as being
outside the statute of limitations.
COMMENT: The statute for a refund claim is generally the latter of (a) three years from assessment date or (b) two years from the date of payment. Assessment here was in 2011, so the first period would have expired in 2014. Assuming she paid the $32 grand before April 2016, the second period would have also expired before she filed in April 2018.
Moy filed a protest with Appeals.
Appeals stalled, responding three times (in December
2019, February 2020, and March 2020), each time asking for another 60 days.
I think we all remember what happened in March 2020,
so I withhold blame.
The IRS dismissed her appeal in January 2021, arguing
that the statute of limitations for refund had expired.
In June 2023, Moy filed a lawsuit against the United
States.
Confused yet?
Let’s sort this out.
What is happening is that there are two statutes of
limitations coming into play here. In fact, it would be more accurate to say two
and a half.
The first is the standard 3 years/2 years. This is the
statute for filing a refund claim. In this context, Moy filing a 2008 return
showing that foreign tax credit counts as a refund claim.
NOTE: In answer to our question above, Moy would file an original – not a an amended – 2008 return. The SFR is not considered a return for this purpose, so the first filing by the taxpayer would be considered the original filing.
Mind you, her 2008 filing was likely outside the 3/2
combo, so how did Moy argue that the statute for refund was still open?
Look at this pearl:
§ 6511 Limitations on credit or refund.
(d) Special
rules applicable to income taxes.
(3) Special rules relating to foreign
tax credit.
(A) Special
period of limitation with respect to foreign taxes paid or accrued. If the
claim for credit or refund relates to an overpayment attributable to any taxes
paid or accrued to any foreign country or to any possession of the United
States for which credit is allowed against the tax imposed by subtitle A in
accordance with the provisions of section
901 or the provisions of any treaty to which the United States is a party, in
lieu of the 3-year period of limitation prescribed in subsection (a) , the period
shall be 10 years from the date prescribed by law for filing the return for the
year in which such taxes were actually paid or accrued.
Yep, the foreign tax credit gets its own 10 year statute of limitations. Let’s see, the 2008 return was due April 2009. Add ten years and we get April 2019. She filed a refund claim in April 2018. She appears to be within the statute period for filing a refund claim.
So why did the Court say she was out of statute?
There is one more statute of limitations to consider.
§ 6532 Periods of limitation on suits.
(a) Suits
by taxpayers for refund.
No suit or proceeding under section
7422(a) for the recovery of any internal revenue tax, penalty, or other sum,
shall be begun before the expiration of 6 months from the date of filing the
claim required under such section unless the Secretary renders a decision
thereon within that time, nor after the expiration of 2 years from the date of
mailing by certified mail or registered mail by the Secretary to the taxpayer
of a notice of the disallowance of the part of the claim to which the suit or
proceeding relates.
This statute applies to the IRS and authorizes the IRS
to pay a refund up to two years after disallowing a claim for refund.
When did the IRS disallow Moy’s refund claim?
In August 2018.
Add two years and you have August 2020.
When did Moy file suit?
In 2023.
The IRS is prohibited from issuing a refund.
To recap, the familiar 3/2 statute of limitations applies
to a taxpayer filing a refund claim.
The second statute
(2 years, no more, no less) applies to the IRS paying the refund claim.
Moy
cleared the first.
She did
not clear the second.
Are
there administrative options?
None
that excites me.
Could
she have done something differently?
While a
long shot, she could have asked to extend the refund statute. The difficulty is
that both sides must sign, and it can be difficult to find someone at the IRS
with authority to sign.
Moy was
hosed. She went into COVID with a two year window to get her refund. Little
could she anticipate IRS employees being sent home - meaning no access to
correspondence mailed to IRS addresses, unprocessed returns and mail
accumulating in trailers, the later shredding of such returns and mail, and the
agency becoming near unreachable for extended periods “due to a high volume of
calls.”
And
those IRS letters asking for “another 60 days”?
You
would have to get a court to allow equitable tolling. Notice that the IRS did
not do so on its own power. They were quick to ask for another six months while
processing Moy’s appeal, but they did not toll a single minute on the Section
6532 limitation on her refund.
Looking back, IRS Appeals should have included Form 907 with any refund claims assigned during the COVID era. Unfortunately, the IRS still has no policy or practice of doing this, so any responsibility for this tax obscurity falls fully on the taxpayer (and his/her tax representative).
Our case this time was Moy v United
States, Case No 23-cv-03151-PP (Northern District of California 2024).