District Court decision highlights importance of filing complete claims for refund

Tax Hot Topics newsletterThe U.S. District Court for the Southern District of California held in Harper et ux. v. United States (No. 18cv2110) that failure to timely file a complete claim for refund prevents ta taxpayer from suing for a refund in federal court.

The taxpayers in the case, a married couple, owned stock in a construction company and employed a third-party consulting firm to perform a study to determine the company’s federal tax credit for increasing research activities under Section 41 (R&D Credit) for the 2008 and 2010 tax years.  

In 2012, the taxpayers filed amended returns on behalf of the company to claim the refund, which, it appears (though the facts are unclear) to be a flow-through entity. The taxpayers also filed Forms 1040X which purported to claim refunds of $437,632 for 2008 and $388,325 for 2010. The IRS denied the taxpayer’s claims on Sept. 12, 2016, and the taxpayers sued in the district court to recover the credits.  

The court determined that it did not have jurisdiction to hear the refund suit because the taxpayers failed to file a proper claim for refund. Under Section 6402 and the regulations thereunder, a claim for refund “must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to appraise the [IRS] of the exact basis thereof.” The court said that the burden of proving that the refund claim had been properly made was on the taxpayers, and that the taxpayers did not meet that burden. Rather, the only evidence of claims submitted by the taxpayers to the IRS were attachments to their Forms 1040X that indicated a claim for the credit, which itself was based on estimates. After the claim was denied, the taxpayers submitted substantiation.

The Harper decision emphasizes the need for taxpayers to timely and adequately document refund claims, especially those that may require complex calculations, such as the R&D Credit. It also demonstrates the IRS’s position in disallowing credit claims it believes to be deficient in detail. Taxpayers should be wary of making refund claims prior to having performed the adequate analysis in determining the correct amount of the credit, with substantiation. Although certain refund claims may be incomplete in nature, such claims must be adequately and timely perfected.

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

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