The Tax Court held that a credit made by the IRS to a taxpayer's account, which stemmed from its misapplication of a payment for the taxpayer's mother in an earlier year, was not an erroneous refund.
Background
Neil Schuster had federal income tax of $3,271 withheld and made an estimated tax payment of $15,000 for 2004. On April 15, 2005, he filed Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and included a $580,000 check to pay what he believed was a reasonable estimate of the amount of tax due for 2004. The IRS granted Schuster an extension of time to Aug. 15, 2005, to file his 2004 tax return.
On April 15, 2005, Schuster also remitted to the IRS an $80,000 payment on behalf of his mother with respect to her tax year 2004. The IRS erroneously credited his mother's $80,000 payment to his account for 2004. On Aug. 15, 2005, Schuster filed for an additional extension until Oct. 15, 2005, which the IRS granted.
The IRS received Schuster's 2004 return on Oct. 21, 2005. In that return, he showed total tax of $519,718, which was less than he had anticipated when he filed Form 4868 on April 15, 2005, and remitted his April 15, 2005, payment to the IRS. On Nov. 28, 2005, the IRS assessed the total tax shown on his 2004 return. On his 2004 return, Schuster elected to apply any overpayment for his tax year 2004 to his 2005 estimated tax. The result of the IRS's error was to increase by $80,000 the amount applied to his 2005 return.
The IRS did not became aware of the error it made regarding the misapplied payment until 2009. Schuster was was either unaware of the error or was aware of it and did not ask the IRS to correct it. Each year from 2004 to 2007 he elected to have excess taxes he had paid and the erroneous credit amount applied to his return for the next year. He used some of the erroneous credit amount in 2006 to offset tax he owed, so the amount of the erroneous credit carried forward to 2007 was reduced to $32,955. Schuster carried forward the same amount from 2007 to 2008. For his 2008 return, Schuster elected to have his excess tax paid for the year refunded to him. Including the erroneous credit carryforward, Schuster's 2008 return showed a refund due of $39,204, so the IRS refunded that amount to him in 2009.
At this point, the IRS finally checked Schuster's account and determined that it had incorrectly applied the $80,000 payment meant for his mother's account in 2004 and allowed the payment to be credited as estimated tax in 2005. According to the IRS, the ultimate result of the error was that Schuster had underpaid his taxes in 2006. Consequently, the IRS assessed additional tax and interest against Schuster for 2006.
After the IRS sent him a notice of intent to levy, Schuster requested a Collection Due Process (CDP) hearing. During that hearing, Schuster did not dispute that he had not paid the entire amount of his assessed 2006 total tax with his own funds or that the credit of $80,000 that was reflected in his 2006 account was the result of a mistake that the IRS had made.
Instead, Schuster argued during the July 30, 2014, hearing that, because the IRS erroneously used the 2006 credit of $80,000 (to the extent of $47,045) against his assessed 2006 total tax, he received an erroneous refund from the IRS for 2006. He maintained (1) he had received an erroneous refund for 2006, and Sec. 7405(d) governed the period within which the IRS was entitled to collect the 2006 erroneous refund from him; and (2) the Sec. 7405(d) limitation period, which he claimed is two years, had expired.
The Appeals officer running the CDP hearing asked the IRS Chief Counsel's Office for its opinion on Schuster's situation. The Chief Counsel's Office determined (1) that the erroneous 2006 credit of $80,000 was a credit transfer, not a refund, which the IRS had erroneously reflected in Schuster's 2006 account, and (2) that the IRS had removed the erroneous 2006 credit of $80,000 from that account around April 2011, thereby correcting that account. Consequently, Sec. 6502(a) governed the period within which the IRS was entitled to collect from Schuster any portion of his assessed 2006 total tax that remained unpaid, as well as any unpaid additions to tax and interest as provided by law for his tax year 2006. Furthermore, the applicable 10-year limitation period under Sec. 6502(a) had not expired. Thus, Appeals sustained the IRS's notice of intent to levy. Schuster then petitioned the Tax Court to review the IRS's determination.
The Tax Court's decision
The Tax Court held that the credit of the $80,000 to Schuster's 2006 account was not an erroneous refund. Therefore, the statute-of-limitation rules for an unpaid assessed liability applied, and the limitation had not run on Schuster's unpaid 2006 assessment.
The Tax Court explained, citing Clark, 63 F.3d 83 (1st Cir. 1995), that the only way for a taxpayer's tax for a year to be paid or satisfied is by a payment tendered by the taxpayer, and not by an amount credited to the taxpayer's account by IRS error. Since Schuster had not himself paid the $80,000 credited to his account, the court found that the $80,000 credit in 2006 was an erroneous credit, and when the IRS reversed that credit in 2011, it simply left Schuster with an assessed but unpaid liability for 2006. Also citing Clark, the court found that the part of the credit that the IRS applied to his 2006 tax liability ($47,045) was not an erroneous refund for purposes of Sec. 7405. Thus, Sec. 6502(a) applied and the collections limitation period was 10 years, so the period the IRS had for collecting Schuster's unpaid tax had not expired.
Reflections
While Schuster lost his case based on a 10-year limitation period, his actions had extended the limitation period. The limitation period normally begins to run on the date the IRS assesses the tax, which was Nov. 5, 2007, for Schuster's 2006 tax. When a taxpayer files a request for a CDP or equivalent hearing, under Sec. 6330(e)(1) the limitation period is"suspended for the period during which such hearing, and appeals therein, are pending. In no event shall any such period expire before the 90th day after the day on which there is a final determination in such hearing." Therefore, the running of the period had been suspended from March 10, 2014, the date on which the IRS received Schuster's Form 12153, Request for a Collection Due Process or Equivalent Hearing.
Schuster, T.C. Memo. 2017-15
