Court Finds That Taxpayer's Letter to IRS Was a Timely Filed Informal Refund Claim

(Parker Tax Publishing November 2019)

A district court held that a taxpayer's letter to the IRS responding to proposed additions to her tax liability constituted an informal claim for a refund that was submitted within the two-year limitations period under Code Sec. 6511(a) because it identified the year at issue, included a detailed explanation as to why the taxpayer disagreed with the IRS's proposed additions to her tax liability, and was signed under penalty of perjury. Particularly significant to the court was that the letter contained substantially the same information as a Form 1040X the taxpayer later submitted, which the IRS treated as a valid claim for a refund but rejected as untimely. Chenette v. U.S., 2019 PTC 404 (N.D. Cal. 2019).

Background

In 2012, Susanna Chenette sold at a loss stock that had been given to her by her grandfather. She deducted the loss on her 2012 tax return. Chenette kept a detailed spreadsheet listing the stock certificate numbers, her exact bases in all the shares, details of all splits, some price history, and gifting dates for all of the stock sold. In September 2014, Chenette received a letter from the IRS saying she underreported her income for 2012 and demanding payment. On December 8, 2014, the IRS sent Chenette an assessment of the taxes, interest, and penalties due.

On October 14, 2014, Chenette responded to the IRS's September 2014 letter by providing a detailed explanation as to why she disagreed with the proposed additions to her federal income tax liability. Chenette signed her October 2014 letter under penalty of perjury and remitted $19,445 to stop the accrual of fines, interest, or penalties. An entry dated October 14, 2014 on Chenette's IRS account described this sum as an advance payment of tax owed and was reflected as a credit of $19,445. On December 22, 2014, the IRS issued a refund of $1,450 to Chenette. In January 2015, Chenette received a notice that the IRS had processed her October 2014 letter and adjusted her tax liability, resulting in the $1,450 refund she had been sent on December 22. This was the first time Chenette was given notice that the IRS had increased her 2012 tax liability.

Chenette continued to challenge the IRS's calculation of her 2012 tax liability. As the two-year statute of limitations to request a refund approached, Chenette decided to file an amended return for 2012. She filed a Form 1040X for 2012 on November 11, 2016, and attached the same information provided in her October 2014 letter. In February 2017, the IRS asked Chenette to complete a Form 8949, Sales and Other Dispositions of Capital Assets. Chenette completed the form and returned it around February 27, 2017. The Form 8949 contained the same information Chenette had provided in her October 2014 letter and her Form 1040X.

On June 12, 2017, the IRS notified Chenette that it had decreased her tax liability and that it owed her a refund of $18,000. However, Chenette never received a refund, despite repeated attempts to obtain it. The IRS refused to issue the refund and ultimately told Chenette, after almost two years of failing to respond to her requests, that her November 2016 refund claim was untimely under Code Sec. 6511(a) and Code Sec. 7422(d). Chenette filed a complaint in a district court.

The government moved to dismiss, contending that the remittance included with Chenette's October 14, 2014, letter was a payment and that the limitations period for filing a refund claim expired two years from that date. According to the government, Chenette did not file a formal claim until November 2016. The government stressed that Chenette did not expressly designate her remittance as a deposit and that, in the Ninth Circuit, a remittance not designated as a deposit is considered a payment.

Chenette challenged the government's interpretation of the law regarding the treatment of the remittance as a deposit or payment. She also argued that, even if the check she sent on October 14, 2014, was a payment, her refund action was not barred because her October 14, 2014, letter was an informal refund claim submitted before the deadline. Chenette further contended that her informal refund claim was followed by a formal claim on Form 1040X which remedied any formal defects or lack of specificity and rendered her refund action timely under the informal claim doctrine.

Under Code Sec. 6511(a), a claim for a refund must be filed with the IRS within the later of three years from the time the return was filed or two years from the time the tax was paid; or, if the taxpayer did not file a return, within two years from the time the tax was paid. Funds remitted by a taxpayer to the IRS may or may not be considered a payment for purposes of Code Sec. 6511(a). Funds that are treated as a deposit rather than a payment do not start the running of the two-year limitation period. Rev. Proc. 2005-18 provides rules governing whether a taxpayer's remittance is a deposit or a payment. The informal claim doctrine provides that an informal refund claim with technical deficiencies that is filed with the statutory period may stop the running of the statute of limitations if a valid refund claim is filed after the statutory period has run. An informal refund claim must be sufficient to apprise the IRS that a refund is being claimed and must specify the tax and the years for which the refund is being sought.

Analysis

The district court found that Chenette's October 2014 letter constituted an informal claim and therefore concluded that it did not need to decide whether her remittance was a payment or a deposit. The court found that the October 2014 letter clearly identified the tax year at issue and contained a detailed explanation as to why Chenette disagreed with the proposed additions to her tax liability. In addition, Chenette signed the letter under penalty of perjury. The court noted that the government pointed to no deficiencies in this informal claim and did not assert that the facts contained within it were insufficient to advise the IRS of the nature of her claim. In the court's view, the facts contained in the October 2014 letter were sufficient to apprise the IRS of Chenette's claim.

Of particular significance to the court was the fact that Chenette's October 2014 letter contained substantially the same information as the Form 1040X that she subsequently submitted in November 2016. The court noted that the government did not identify any deficiencies with the Form 1040X and treated it as a claim for a refund (albeit untimely) without objecting to its form or content. Even more telling in the court's view was that approximately seven months after Chenette submitted the Form 1040X, the IRS notified her that she was entitled to a refund of the December 8 assessment. In the court's view, this indicated that the explanation Chenette provided on her Form 1040X - and thus in the October 2014 letter as well - was sufficient to apprise the IRS of the issues and allow it to investigate, ultimately leading the IRS to conclude that Chenette had correctly calculated her 2012 tax liability in her original 2012 tax return.

For a discussion of informal refund claims, see Parker Tax ¶261,115.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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