Treating a Refund Request Made on an Incorrect Form as an Informal Refund Claim

Editor: Jon Almeras, J.D., LL.M.

Procedure & Administration

To obtain a refund of taxes, a taxpayer must timely file a refund claim with the IRS within the refund statute of limitation. A refund claim must set forth in detail each ground on which the refund is claimed and include facts sufficient to apprise the IRS of the exact basis thereof. Occasionally, taxpayers have failed to satisfy the formal claim requirements within the refund statute of limitation but nevertheless assert they have made timely “informal claims” that put the IRS on notice of their desire to seek a refund. The informal-claim doctrine has been recognized and applied by both the courts and the IRS.

Certain factors dictate whether a taxpayer is considered to have made a timely informal refund claim. Most courts require that, to be valid, an informal claim must inform the IRS that a refund is sought, give notice of the tax and year at issue, and include a written component. This item discusses some situations in which taxpayers have argued that a refund request made on an incorrect form is a valid informal refund claim.

Background

Before discussing the factors used to determine whether a taxpayer has made a valid informal refund claim, it is important to understand the basic principles of refund claims and the time frames for filing them.

Refund claims: Sec. 6511(a) requires taxpayers to file their claim for a refund within three years from the time of filing the relevant return or two years from the time of payment of the tax, whichever period expires later.

Regs. Sec. 301.6402-2 contains the basic requirements for a valid claim for refund. The claim must:

1. Set forth in detail each ground upon which the refund is claimed and facts sufficient to apprise the IRS of their exact basis;
2. Be verified by a written declaration made under penalties of perjury;
3. Be submitted on the appropriate form;
4. Be filed with the service center serving the district in which the tax was paid; and
5. In the case of income, gift, and unemployment taxes, be filed as a separate claim for each type of tax for each tax period.

Although the regulations set forth the formal requirements for making a refund claim, courts have held that under certain circumstances, it is sufficient that the taxpayer submits an informal claim within the refund limitation period, and then, outside the refund limitation period, submits a formal claim.

Informal refund claims: A timely filed informal refund claim will toll the refund statute of limitation until the taxpayer can file a formal refund request. To be valid, an informal claim must apprise the IRS that a refund is sought, give notice of the tax and year at issue, and include a written component.

A leading case in the area of informal refund claims is Kales, 314 U.S. 186 (1941). In Kales, the informal claim took the form of a letter, along with the taxpayer’s course of dealing with the IRS. The taxpayer obtained a ruling from the IRS (then called the Department of Internal Revenue) establishing the value of stock she owned as of March 1, 1913, and the value was used in reporting the amount of gain on the sale of the stock in 1919, reflected in taxes paid in 1920.

Subsequently, the IRS decided the value in the ruling was too high and asserted a deficiency for 1919 based on an increase in the gain. The taxpayer paid the additional tax, but at the same time wrote a letter to the IRS protesting that the IRS was not entitled to reopen the question of value and was bound by the value in the ruling. The taxpayer added that “if for any reason a revaluation shall be had” the taxpayer “will insist” that the stock was greatly undervalued by the IRS in the original ruling and that the taxpayer “will claim the right to a refund.” The letter was written on March 23, 1925, before the refund statute of limitation (then five years) had expired.

After the statute had expired, the taxpayer filed a formal claim for refund. The Supreme Court held that the passage in the letter was sufficient to find that a timely informal claim for refund had been made, which was perfected by the formal claim. In reaching this conclusion, the Court observed:

This Court, applying the statute and regulations, has often held 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. . . .

In applying these guiding principles to the case in hand it is necessary to read the letter of March 23, 1925, in the light of the peculiar circumstances then well known to the Commissioner and referred to in the letter. The letter dealt with two distinct subjects. One was the jeopardy assessment which the taxpayer was about to pay and did in fact pay to the collector on the following day when the letter in duplicate was given to the collector and the Commissioner. The other, stated in paragraphs 9 and 10 of the letter, related to the liability of the Government for overpayments of 1919 taxes made to Collector Grogan in 1920, in the event that the Commissioner’s 1919 assessment of the Ford stock should be set aside by the courts or administrative action. In that event the letter recites that the 1919 valuation was too low, the tax paid in 1920 was too high, and asserts the taxpayer’s consequent “right to a refund of said tax to the extent of such excess.” [Kales, 314 U.S. at 194 (citations omitted)]

The determination of whether a taxpayer has satisfied the requirements for an informal claim is made on a case-by-case basis and is based on the totality of the facts (American Radiator & Standard Sanitary Corp., 318 F.2d 915 (Ct. Cl. 1963)). In American Radiator, the Court of Claims focused on the adequacy of the notice to the IRS:

Informal refund claims have long been held valid. But they must have a written component, and should adequately apprise the [IRS] that a refund is sought and for certain years. It is not enough that the [IRS] have in its possession information from which it might deduce that the taxpayer is entitled to, or might desire, a refund; nor is it sufficient that a claim involving the same ground has been filed for another year or by a different taxpayer. On the other hand, the writing should not be given a crabbed or literal reading, ignoring all the surrounding circumstances which give it body and content. The focus is on the claim as a whole, not merely the written component. In addition to the writing and some form of request for a refund, the only essential is that there be made available sufficient information as to the tax and the year to enable the [IRS] to commence, if it wishes, an examination into the claim. [American Radiator, 318 F.2d at 920 (citations omitted)]

The requirement that a taxpayer must provide the IRS with adequate notice that the taxpayer is seeking a refund within the refund statute-of-limitation period is dictated by the policies underlying Sec. 6511(a). That section is designed to protect the IRS from “the assertion of stale claims which would be difficult or impossible to determine on their merits due to the passage of time” (Newton, 163 F. Supp. 614 (Ct. Cl. 1958)). By requiring a taxpayer to put the IRS on notice during the refund statute-of-limitation period that the taxpayer “is in fact making a claim for refund” (id. at 619), then the IRS can respond by beginning a factual investigation before the claim becomes stale. Without such a timely notice, the IRS would not have sound reason to begin a timely investigation (Donahue, 33 Fed. Cl. 600 (1995)).

Based upon the above, the Tax Court uses a three-factor test to determine whether an informal refund request has been made.

1. The writing is delivered to the IRS before the expiration of the applicable period of limitation;
2. The writing, in conjunction with the surrounding circumstances, adequately notifies the IRS that the taxpayer is claiming a refund and the basis for it; and
3. Either the IRS waives the defect by considering the refund claim on its merits, or the taxpayer subsequently perfects the informal refund claim by filing a formal refund claim before the IRS rejects the informal refund claim (see, e.g., Jackson, T.C. Memo. 2002-44).

    

Informal refund claims based on incorrect form: Many cases deal with whether a taxpayer has satisfied the written-component requirement for an informal claim. In some of these cases, taxpayers argued that filing a form other than the proper refund claim form was sufficient to satisfy the written-component requirement.

Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return

A comparison of two cases involving Form 4868 highlight the danger of relying on the informal-claim doctrine. In Khinda, T.C. Memo. 1994-617, the taxpayer timely requested a filing extension of his 1990 tax return by filing Form 4868, which included an estimate of tax liability for the year. Several years later, the taxpayer filed a late return in which a formal request for refund was included. Because the formal request was filed after the deadline, the taxpayer argued that Form 4868 was an informal refund claim and the late return perfected the claim. The Tax Court disagreed, holding that Form 4868 “does not provide the Commissioner sufficient notice that the taxpayer is claiming a refund. Rather, it simply provides an estimate of tax liability.” Because the IRS was not provided sufficient information to investigate the alleged overpayment, the court held that the Form 4868 did not contain an informal claim for refund.

A married couple, however, succeeded in having a Form 4868 treated as an informal refund claim. In Kaffenberger, 314 F.3d 944 (8th Cir. 2003), the Eighth Circuit upheld a jury verdict that the taxpayers had made a timely informal refund claim on Form 4868. Due to confusion about the status of the taxpayers’ refund from 1988, when they filed Form 4868 for 1990, they included $26,700 as “other payments and credits” that had not been paid in that year, but which they instead intended to carry over. For 1989, they paid estimated taxes but did not file a return before the IRS filed a substitute for return for them in 1994 that included the 1988 overpayment, which resulted in an overpayment for 1989 of $38,309. Earlier in 1994, the taxpayers filed their 1990 return, which showed a liability of more than $36,000. The IRS initially told the taxpayers the 1989 overpayment would offset the 1990 liability but then denied the offset because the statute of limitation for a refund for 1989 had expired. The court held that the Form 4868 was enough to satisfy the written requirement and that the informal claim was therefore valid. In doing so, the court emphasized that the information on Form 4868 was not the only information to be considered. Rather, so long as some written request is made, all the facts and circumstances should be taken into account. The court said,

In making this factual inquiry, it is important to note that the written component within the statutory period—Form 4868 in this case—need not contain all of the information necessary to put the IRS on notice that a refund was being sought. . . . The focus is on the claim as a whole, not merely the written component. [Kaffenberger, at 955 (internal quotations omitted)]

The court examined the Form 4868 in conjunction with the taxpayers’ other filings and associated IRS notices and concluded that the IRS had sufficient notice of the refund request.

Supplementary Schedules to Form 1120, U.S. Corporation Income Tax Return

A case involving a corporation’s return further emphasizes the importance of the surrounding facts and circumstances on the validity of an informal claim. In American Radiator (discussed above), the taxpayer claimed it made informal claims through various schedules, including one titled “Federal Taxes Refundable” in its 1949 Form 1120, United States Corporation Income Tax Return, and certain notations on its 1949 and 1950 returns. In 1953 and 1954, after the periods for filing refund claims had expired, the taxpayer filed formal refund claims for the items identified on the 1949 and 1950 returns. The IRS rejected the claims, and the taxpayer filed suit.

The Court of Claims held that the notations and figures in the returns, along with the knowledge of the IRS agent who had examined the taxpayer’s returns for 1949 and 1950, were sufficient to satisfy the writing and notice requirements of the informal-claim doctrine. Although certain details of the basis for the refund claim were missing from the notations and figures, the formal refund claims submitted by the taxpayer supplied that information and, thus, the informal claim was perfected prior to the IRS’s rejection.

Form 12203, Request for Appeals Review

The facts-and-circumstances inquiry for informal refund claims is not limited to those existing at the time that the claim is made. Subsequent events can also affect whether a claim is deemed to be valid. In Blue, 108 Fed. Cl. 61 (2012), as part of a mail exchange with the IRS and in response to a statutory notice of deficiency, the taxpayer filed Form 12203, requesting an appeal, and paid the assessed tax. The IRS rejected the appeal request in a letter stating that the taxpayer’s “claim for refund . . . was disallowed” and informing him that if he disagreed, he could file a complaint for recovery in the appropriate federal court. When the taxpayer filed a suit for refund, the IRS moved to dismiss because no formal refund claim had been submitted. Even if the taxpayer’s prior filing was deemed to be an informal claim, the IRS argued, it had not been perfected.

The Court of Federal Claims determined that the taxpayer’s Form 12203 was not an informal claim but nonetheless constituted a refund claim because the IRS had treated it as one, thereby waiving the formal regulatory refund requirements, and that the taxpayer could pursue his case. The court noted that the purpose of the waiver doctrine is “to prevent IRS agents from lulling taxpayers into missing the limitations deadline” (quoting Computervision, 445 F.3d 1355, 1366 (Fed. Cir. 2006)).

Form 8379, Injured Spouse Allocation

Recently, the Tax Court decided Palomares, T.C. Memo. 2014-243, in which the taxpayer filed Form 8379 to request innocent spouse relief and to request a refund, neither of which is properly done on Form 8379. The IRS responded to the taxpayer’s request by advising her of the proper form to use for innocent spouse relief. No investigation was done on her refund request at that time, and she did not pursue the issue until later, when the refund statute of limitation had closed.

The court determined that the IRS had not been adequately apprised of the refund request and, therefore, the request did not qualify as a valid informal claim. The taxpayer’s request on Form 8379 was sufficient to satisfy the written requirement, but she neglected to indicate that the requested refund related to the 1996 tax year. Because the IRS was missing that key information—which was not provided on either Form 8379 or through other means—the Tax Court refused to treat her request as an informal claim.

Conclusion

The informal-claim doctrine can provide equitable relief to a taxpayer who fails to satisfy requirements for filing a valid refund claim. Taxpayers who may have missed a deadline for a formal refund claim should carefully examine whether any of their filings with the IRS, in conjunction with their other communications, contained sufficient detail about a refund request. Taxpayers must be aware, however, that the informal-claim doctrine has been subject to numerous interpretations, and courts have been inconsistent in determining what qualifies as an informal claim for refund.

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EditorNotes

Jon Almeras is a tax manager with Deloitte Tax LLP in Washington.

For additional information about these items, contact Mr. Almeras at 202-758-1437 or jalmeras@deloitte.com.

Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP.