Can the IRS Waive Compliance With Tax Rules?

Published Categorized as IRS Audits
Can The Irs Waive Compliance With Tax Rules?
Can The Irs Waive Compliance With Tax Rules?

What happens if you make a technical foot fault while working with the IRS? Say you miss a deadline or a filing requirement. Can the IRS waive compliance with the deadline or requirement?

IRS personnel will often say that they cannot. But in reality, the IRS can waive most procedural requirements. The authority for this is found in the waiver rules developed by the courts.

In Brown v. United States, No. 19-848 (Ct. Cl. 2020), the court recently addressed the waiver rules in the context of the requirement to sign a refund claim. The case presents an opportunity to consider the IRS’s power to waive compliance with our tax rules.

Facts & Procedural History

The taxpayers are U.S. citizens. The taxpayer-husband worked in Australia in 2015-2017.

The taxpayers either filed tax returns for these years and over-reported the husband’s income for these years or the IRS made an adjustment that included too much income.

The taxpayers filed refund claims to correct the amount of tax. The refund claims asserted that the husband’s income from working in Australia was excluded from tax pursuant to I.R.C. § 911.

The refund claims were signed by the taxpayers tax return preparer. The refund claims did not include a Form 2848, Power of Attorney and Declaration of Representative.

The IRS disallowed the refund claims. The taxpayers paid the tax and filed suit in the U.S. Court of Federal Claims to recover the tax paid.

The government filed a motion to dismiss the tax litigation, as the taxpayers did not file refund claims that were signed by the taxpayers or an authorized representative.

The Signature Requirement

A refund claim has to be signed by the taxpayer or his authorized representative. There have been a number of disputes that addressed whether a signature on a tax return is valid.

There have also been cases that consider whether a signature on a Form 2848 is valid. The Form 2848 is the form that is used to authorize a representative to sign a tax return.

Most practitioners will mail a copy of the Form 2848 with the tax return that they are signing for the taxpayer. They will also file a copy with the IRS Centralized Authorization Unit or CAF Unit.

The tax preparer here did not do either of these things. It appears that the taxpayers and the tax return preparer did not sign a Form 2848 for the tax return preparer. It may have been that the tax preparer was not authorized to sign the form. Only licensed tax attorneys, CPAs, or enrolled agents can sign the form, generally. The tax return preparer here may not have earned one of these designations.

This case considers whether the IRS can waive the signature requirement for refund claims.

Waiver by the IRS

The taxpayers argued that the IRS waived the signature requirement by examining their refund claims.

The taxpayers cited Angelus Milling Co. v. Comm’r, 325 U.S. 293 (1945). The Angelus case says that the IRS can waive regulatory requirements, but not statutory requirements.

The courts have developed a three factor test for waiver:

  1. The IRS must have investigated the merits of the refund claim
  2. The IRS must have taken action upon the refund claim, and
  3. The IRS’ determination to dispense with the formal regulatory requirements and “to examine the merits of the claim” must be unmistakable.

The taxpayers argued that the IRS fully investigating the merits of the claims. It appears this was the case. The IRS issued claim disallowance letters and the matter was forwarded to the IRS Office of Appeals.

The only question was whether the signature requirement for a refund claim is statutory or regulatory. The requirement is found in the Code and the regulations. In fact, the Code says that returns are to be signed as required by the regulations.

Given the requirement in the Code, the court concludes that the IRS was not able to waive the signature requirement. The result was that the court did not have jurisdiction over the case, as a valid and signed refund claim was a prerequisite for bringing suit.

The Takeaway

While this case focused on the signature requirement for refund claims, the waiver doctrine is broader than this. The IRS can waive regulatory rules outside of the narrow issue of the signature requirement at issue in this case.

Taxpayers can invoke this rule in any number of situations. To do so, taxpayers have to determine whether the requirement is regulatory (i.e., not a requirement imposed by the Code) and get the IRS to consider the issue and reach a decision on the issue.

There are several methods for getting the IRS to investigate a tax position, including audit reconsideration requests, offers in compromise based on doubt as to liability, refund claims, penalty abatement requests or claims, taxpayer advocate assistance orders, and others.

If the taxpayer can get the IRS to consider their issue, it opens the door to this waiver argument. This can provide a valuable defense to technical foot faults that may have been made.

Watch Our Free On-Demand Webinar

In 40 minutes, we'll teach you how to survive an IRS audit.

We'll explain how the IRS conducts audits and how to manage and close the audit.  

Before You Go....Try our eBook: Win Your IRS Audit: A Step-by-Step Guide
  • Clear and non-technical explanations

  • Practical guidance and tips

What You Need to Know to Win Your IRS Audit.