Taxpayers may find it challenging to obtain a refund from the government, as the courts and Congress have imposed stringent requirements on the refund claims filed by taxpayers. Even minor procedural errors can be detrimental to the claim, resulting in the government gaining an unwarranted windfall. The recent case of Vensure HR, Inc. v. United States, No. 20-728T (Ct. Cl. 2023), exemplifies this, where the government was able to retain $3 million due to a dispute regarding the signature of a tax attorney on a refund claim. This is one of those cases that a lot of taxpayers would strongly disagree with, even if it was not their refund claim being denied.
Facts & Procedural History
This case involves a “Professional Employer Organization” or PEO. A PEO provides payroll and tax administration services to other businesses. It does this by employing the business’ workers and basically leasing the employees back to the business. The PEO assumes the Employer-Employee relationship for the employees. The PEO files the payroll tax returns and remits the payroll taxes for the business, and is paid a fee for doing so. The PEO will usually file one combined payroll tax return for all of its business clients.
In this case, the PEO filed payroll taxes and apparently one of the clients did not reimburse the PEO for the taxes the PEO paid for the client. The taxpayer filed a refund claim for $4 million in taxes as a result. The IRS only allowed $1 million of the refund. This caused the PEO significant financial difficulties, which resulted in the PEO being late on its payroll taxes for the subsequent periods. The IRS imposed late payment penalties on the PEO for the subsequent periods.
The PEO then submitted refund claims for the penalties. These refund claims were submitted on Forms 843, Claim for Refund and Request for Abatement, which were prepared and signed by the PEO’s tax attorney. The tax attorney had a Form 2848, Power of Attorney and Declaration of Representative, on file with the IRS. As such, the tax attorney did not include a copy of Form 2848 with the Form 843 submissions.
The IRS denied the refund claims, asserting that the claims did not establish reasonable cause. The taxpayer then brought suit against the government in the U.S. Court of Federal Claims. The parties filed motions that were treated as motions to dismiss, which turned on whether Form 843 without an accompanying Form 2848 was a valid refund claim.
Signature Requirements for a Refund Claim
To be able to sue the government for a refund of taxes, one has to first file a refund claim. The refund claim does not necessarily have to be on the IRS’s own forms, but it generally has to meet certain requirements. These requirements include a requirement that the writing that is intended to be a refund claim be signed by the taxpayer under penalties of perjury:
No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed before the expiration of such period. The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. The statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund or credit.
The regulations go on to say that an agent may file the refund claim, but that a Form 2848 has to “accompany the claim.” This sentence is not readily apparent when reading the regulation. It is set out in a single sentence at the very end of a block of text that applies to fiduciaries, trustees, etc. that file tax returns for a deceased person.
The Parties Arguments
The taxpayer argued that the tax attorney already had its Form 2848 on file with the IRS. This is the process that the IRS follows and requires for tax attorneys. The IRS even has a whole unit whose only function is to receive and process Forms 2848 and to make the information available to all IRS employees.
The government argued that Form 2848 had to accompany the refund claim. According to the government, because Form 2848 did not accompany the refund claim, the refund claim was invalid. Curiously, the government also argued that Form 2848 which was on file with the IRS did not authorize the tax attorney to file Form 843.
The court did not have to get to the government’s second argument, as the court agreed with the IRS on its first argument. The court held that the refund claim was invalid. The court noted in a footnote that this case differed from a prior case it had considered, Warnement v. United States, where the court denied the government’s motion to dismiss a penalties refund suit because the taxpayer had attached a Form 2848 to each of their Form 843 claims for refund which authorized their attorney to sign the claim for refund.
Attaching Form 2848 Cannot Be Waived
The taxpayer argued, rightfully so, that the IRS had waived any defect in the refund claim by not raising the issue sooner. The court summarized the waiver law as follows:
The Federal Circuit has held that the Angelus Milling waiver doctrine applies to regulatory requirements when “(1) there is clear evidence that the Commissioner understood the claim that was made, even though there was a departure in form in the submission, (2) it is unmistakable that the Commissioner dispensed with the formal requirements and examined the claim, and (3) the Commissioner took action upon the claim.” Brown, 22 F.4th at 1013 (citing Angelus Milling, 325 U.S. at 297-98).
The court also did not accept the taxpayer’s waiver argument. According to the court, this line of cases does not apply as the signature requirement on a refund claim is not a regulatory requirement. It is a statutory requirement. Apparently, there is a difference between a statutory and a regulatory requirement–even though statutes and regulations are binding laws when it comes to taxes.
This court also did not address cases like Harper v. United States, No. 19-55933 (9th Cir. 2021), which involved audits and a holding that the IRS cannot deny waiver when it was fully apprised of the circumstances. The Harper case involved a multiyear audit and a claim submitted on audit. In court, the IRS argued that the refund claim was defective even though it had fully audited the claim. This line of cases addresses whether the materials accompanying a refund claim provide sufficient information to apprise the IRS of the nature of the claim. This too would seem to be a statutory requirement and not a regulatory one.
Reading the court cases, if there is a distinction between statutory and regulatory requirements, it is not all that clear what the distinction between regulatory and statutory means. This is particularly true in the present case when the rule that is being cited for Form 2848, the signature rule, is found in the regulation and not in the statute. that would seem to imply that the requirement was a regulatory requirement, contrary to the court’s holding.
The real problem with this type of case is that the time period for filing a second refund claim will likely have expired by the time the government raises the issue in court. It will typically be too late to go back and file another refund claim that has Form 2848 attached.
This case shows how important it is to include Form 2848 with a refund claim if someone other than the taxpayer is signing the refund claim. This is an easy oversight to make and many may not think that the form has to be submitted again if it is on file with the IRS. This redundancy seems superfluous given that Form 2848 was on file with the IRS.
Because the IRS often fails to process Forms 2848 or finds fault with these forms, a better practice is to have the taxpayer sign Form 843 directly. This can help avoid these types of disputes.