Ninth Circuit: Untimely Informal Claim Dooms Taxpayers' $700,000 Refund

(Parker Tax Publishing August 2024)

The Ninth Circuit affirmed on different grounds a district court's dismissal of a taxpayers' refund action after finding that their informal refund claim was untimely under Code Sec. 6511(a). The court found that, because the taxpayers had not filed a return for the year at issue at the time of the informal refund claim, the limitations period was two years from the date of the payment, and the court further found that the taxpayers' later-filed return for the year at issue did not change the limitations period for their informal refund claim. Libitzky v. U.S., 2024 PTC 275 (9th Cir. 2024).

Background

For years, married couple Moses and Susan Libitzky overpaid their federal income tax and applied overpayment credits to their tax liability for the following year. The Libitzkys relied on Mark Albrecht, a tax accountant, to prepare and file their tax returns. But Albrecht suffered from a substance abuse disorder that interfered with his professional obligations, including meeting filing deadlines.

In April 2012 the Libitzkys had tax credits of $1,185,332. Despite these credits, the Libitzkys received a six-month extension to file their 2011 joint tax return, and made an additional $310,000 payment towards their 2011 taxes. Albrecht, however, did not file the Libitzkys' tax return by the extended deadline. The Libitzkys made an additional $455,000 in tax payments to the IRS in 2012. In April 2013, shortly before 2012 taxes were due, the Libitzkys once again requested and received an extension from the IRS. On that extension request, the Libitzkys estimated their 2012 tax liability at $511,471 and their total tax payments at $1,149,068.

In early 2013, the IRS sent the Libitzkys a CP59 notice, informing them that they had never filed a return for the 2011 tax year. Then, in June 2013, the IRS sent them a CP518 letter, a final reminder that it had not received their 2011 tax return. Both notices warned the Libitzkys that they risked losing their tax refund if they failed to promptly file their 2011 return. The Libitzkys did not respond to these notices, nor did they timely file their 2012 return. In October 2014, the Libitzkys filed their 2013 return (despite having still not filed a return for 2011 or 2012). The IRS advised the couple in a CP23 discretionary notice that they owed an additional $577,924 for the 2013 tax year. At this point, the Libitzkys finally realized that their 2011 and 2012 tax returns had not been filed and forwarded the CP23 notice to Albrecht.

Albrecht contacted the IRS in February 2015 by letter and phone call. In the letter, he claimed that the CP23 notice failed to recognize $645,119 of overpaid 2012 income taxes that should have been applied to the Libitzkys' 2013 tax liability. Along with the letter, Albrecht also finally submitted the Libitzkys' 2012 tax return, which stated that the couple had $1,147,690 in tax credit for 2012. Although the 2012 return did not differentiate between payments made in 2012 and the refund credits claimed from overpayments in 2011, the IRS's response to the return showed that the IRS understood the Libitzkys were claiming credits for their 2011 overpayments. The IRS also reminded the Libitzkys that it had still not received their 2011 return.

During a February 2015 phone call with the IRS, Albrecht stated that the Libitzkys planned to claim a refund for 2011 overpayments. At that time, Albrecht did not have power of attorney to discuss the Libitzkys' taxes. About five months later, Albrecht called the IRS again with power of attorney. The IRS informed him that there was a delinquency investigation for the Libitzkys' 2011 return, which still had not been filed. Albrecht once again advised the IRS that the Libitzkys "would have carried forward credit that would eliminate the balances on the account." Following the phone call, Albrecht still did not file a 2011 return.

On August 31, 2015, the IRS informed the Libitzkys of its intent to seize their assets for an amount due of $616,497. Albrecht responded on September 16, stating that the Libitzkys would file a 2011 return by September 23 and that carryovers from 2011 and 2012 would pay in full their liability for 2013. Albrecht failed to file the Libitzkys' 2011 return. In late December 2015, the IRS directed an agent collect on the delinquent 2011 tax return. The agent noted that the Libitzkys' IRS account had credits of $1,495,332 but also had balances due for 2012 and 2013 and a delinquent 2011 return.

On January 20, 2016, the Libitzkys finally filed a return for 2011 and along with it, made a formal refund claim for their 2011 overpayment. The filing of the 2011 return satisfied a little over $610,000 in taxes and interest owed by the Libitzkys. But given the Libitzkys' large overpayments made over the years, they had an overpaid balance of $692,690. The overpayment was deemed to have been made on April 17, 2012, the due date of the 2011 tax payment.

Observation: In sum, there are three key dates to keep in mind. The Libitzkys' 2011 taxes were considered to have been paid on April 17, 2012. The Libitzkys argued that Albrecht's communications with the IRS from February 2015 to September 2015 repeatedly informed the IRS that the Libitzkys intended to claim credit for overpayment of their 2011 taxes. And the Libitzkys filed both their 2011 tax return and their formal claim for a refund on January 20, 2016.

In February 2018, the Libitzkys sued for a refund of their 2011 overpayment. In Libitzky v. U.S., 2023 PTC 44 (N.D. Cal. 2023), a district court dismissed the case for lack of jurisdiction, finding that the Libitzkys failed to make an adequate and timely refund claim because their communications with the IRS did not amount to an informal claim for a refund. The Libitzkys appealed to the Ninth Circuit.

Under Code Sec. 6511(a), a refund claim must be filed by the later of: (1) three years from the time the return was filed, or (2) two years from the time the tax was paid. The statute further provides that if no return was filed by the taxpayer, the deadline is two years from the time the tax was paid. However, even if a taxpayer makes a timely refund claim, the refund amount will depend on the applicable look-back period provided in Code Sec. 6511(b)(2). Under that provision, if the three year limitation period under Code Sec. 6511(a) applies, then the amount the taxpayer can recover is limited to the tax paid within the three year period preceding the filing of the refund claim, plus the period of any extension for filing the return. On the other hand, if the two-year period under Code Sec. 6511(a) applies, then the refund amount cannot exceed the tax paid during the two years immediately preceding the filing of the claim. In short, both the limitation period and the look-back period are shorter and less generous for taxpayers who do not timely file their tax returns.

The Libitzkys argued that the three-year limitation under Code Sec. 6511(a) applied because they filed both their formal refund claim and 2011 return on January 20, 2016. They further contended that they satisfied the look-back period in Code Sec. 6511(b) because they filed an informal refund claim by September 2015 at the latest because they had sufficiently alerted the IRS of their intent to use their tax overpayments. The Libitzkys reasoned that if September 2015 was considered the informal refund claim date, then their overpayment of taxes, made in April 2012, occurred within the three and a half year look-back period of Code Sec. 6511(b).

Analysis

The Ninth Circuit affirmed on different grounds the dismissal of the Libitzkys' lawsuit for lack of jurisdiction. The court found that although the Libitzkys made a timely formal refund claim, the applicable Code Sec. 6511(b)(2) look-back provision barred recovery.

The court found that the three-year limitation period under Code Sec. 6511(a) applied because the Libitzkys filed a formal refund claim in January 2016. The court further found that the same three-year period applied under the look-back period (plus any extension granted). The Libitzkys were granted a six-month extension to file their 2011 return. They were therefore entitled to a three-and-a-half year look-back period for their formal refund claim. The Libitzkys were deemed to have made their overpayment for 2011 on April 17, 2012, the day their 2011 return was due. And because April 17, 2012 was more than three and a half years before January 20, 2016, the court found that the Libitzkys missed the look-back period by a little over three months and could not recover any of the $692,690 in tax overpayments.

In the court's view, even if the Libitzkys made a valid informal refund claim by September 2015, their informal claim was untimely. The court noted that at the time the Libitzkys submitted their informal claim, they had not yet filed a return for the 2011 tax year - it was filed in January 2016. Code Sec. 6511(a) says that if a taxpayer has not filed a return, he or she has two years from the time the tax was paid to make a refund claim. The court found that the Libitzkys' position - that their later-filed tax return changed the applicable limitation period for their prior-filed informal claim - misconstrued the statute's text and the purpose of the informal claim doctrine, which is to stop the running of the statute of limitations when an informal refund claim is filed with the limitations period.

Because the two-year limitation period applied under Code Sec. 6511(a), the court determined that any informal claim had to be lodged by April 2014 (i.e., two years after the overpayment of taxes in April 2012). The court noted that almost all the communications with the IRS cited by Libitzkys occurred between February and September 2015. The only potentially relevant pre-April 2014 communication was the Libitzkys' extension request filed on April 15, 2013. But the court found that the IRS grants extension requests as a matter of course and does not review them for substance.

According to the court, the requirements of Code Sec. 6511 may not be divided and conquered. The court reasoned that the limitation and look-back periods of Code Sec. 6511(a) and (b)(2) are interdependent, as evidenced by the various timing cross-references in the statute. The Libitzkys' attempt to cherry-pick different claim dates - the formal claim date for Code Sec. 6511(a) and then the informal claim date for Code Sec. 6511(b)(2) - failed because the look-back period is explicitly determined by the limitation period. Specifically relevant here, Code Sec. 6511(a) requires that, for the three-and-a-half year look-back period to apply, the refund claim had to be filed "within 3 years from the time the return was filed." The court found that it was impossible for the Libitzkys' informal claim to satisfy that requirement because it was filed before the return. Thus, the two-year limitation period applied to the informal claim, and the Libitzkys were not entitled to recover.

The court observed that this was an unfortunate case with a potentially unjust outcome for the Libitzkys. Everyone agreed that the Libitzkys overpaid their taxes by almost $700,000. Their practice of overpaying their taxes effectively gave the United States an interest-free loan. The Libitzkys' accountant, whom they relied on to file their tax returns, failed to meet critical filing deadlines. However, the court said it was bound by the statutory language enacted by Congress.

For a discussion of the statute of limitations for refunds or credits of overpayments, see Parker Tax ¶261.180. For a discussion of jurisdiction and timing of refund suits, see Parker Tax ¶261,190.

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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