There is little doubt that the federal tax laws are complex and confusing. For example, assume a taxpayer wants to determine whether an annuity is taxable. To begin the inquiry, the taxpayer should consult the primary body of authority on federal tax law: the Internal Revenue Code of 1986, as amended (the “Code”). After perusing the table of contents, the taxpayer would likely stumble upon I.R.C. § 61, which defines gross income to mean “all income from whatever source derived . . . including . . . annuities” unless otherwise provided in the Code.
But, taxpayers who stop there have only half the answer. Indeed, the diligent taxpayer must press on and scour additional provisions of the Code. After additional research, the taxpayer may discover the provisions of the Code that specifically include items in gross income, see I.R.C. §§ 71-91, and others that specifically exclude items from gross income, see I.R.C. §§ 101-140.
Eventually, the taxpayer may arrive at I.R.C. § 72, angrily review and re-review the definition of “investment in the contract,” and conclude that a portion of the annuity may be taxable whereas the other portion may not be taxable. See I.R.C. § 72(a)(1), (b). Of course, this example does not take into account other bodies of federal tax law that may need to be consulted, such as Treasury Regulations and federal court cases—the latter of which have spawned doctrines including substance-over-form, assignment of income, and the “tax benefit rule.”
Incredibly, the above example only goes over substantive tax law. Buried in another portion of the Code is perhaps a more complex and nuanced part referred to as “Procedure and Administration.” See I.R.C. §§ 6001-7874. This part of the Code provides detailed rules and mechanisms for, among other things, challenging IRS assessment and collection actions and filing claims for refund. Again, these rules are supplemented and clarified to some extent by Treasury Regulations and federal court cases.
Unfortunately, the federal court cases are littered with decisions where taxpayers failed to follow the procedural rules, losing their cases on mere technicalities or “foot-faults.” To avoid these mishaps, it is not uncommon for taxpayers to engage tax professionals to guide them through the procedural morass. But, as the United States Court of Federal Claims decision in Dixon v. U.S., 147 Fed. Cl. 469 (Fed. Cl. 2020) shows, sometimes this is not necessarily enough.
I. Factual Background
Mr. Dixon had business activities overseas in Australia. As a result, he paid foreign taxes. For the tax years 2013 and 2014, he filed original returns with the IRS. However, in 2016, Mr. Dixon discovered that he had not claimed foreign tax credits he believed he was entitled to, and therefore sought the professional tax advice of Mr. Castro.
As is common with IRS tax representation, Mr. Castro submitted an IRS Form 2848, Power of Attorney and Declaration of Representative, to the IRS. However, the Form 2848 did not specifically authorize Mr. Castro to file original or amended returns for the years at issue, nor did the Form 2848 check the box authorizing Mr. Castro to sign a return. Moreover, Mr. Dixon never signed the Form 2848.
Generally, taxpayers have three years from the filing of a timely filed original return to file a claim for refund. Thus, in 2017, Mr. Castro submitted Mr. Dixon’s 2013 and 2014 amended returns to the IRS. Those returns, if accepted, would provide Mr. Dixon with significant refunds of approximately $1.8 million. Significantly, Mr. Castro signed the amended returns. Stated differently, Mr. Dixon did not sign the returns. In addition, the amended returns were not accompanied with a Form 2848.
Months later, the IRS assessed additional taxes, penalties, and interest against Mr. Dixon for his 2013 tax year. Mr. Dixon paid the additional taxes. The IRS also examined Mr. Dixon’s 2014 tax year, but apparently no additional assessments were made.
Because the IRS never refunded Mr. Dixon any amounts for 2013 and 2014, he filed a complaint against the United States in February 2019 in the Court of Federal Claims. In response, the United States filed a motion to dismiss the complaint for lack of subject-matter jurisdiction. In its motion, the United States contended that Mr. Dixon’s amended returns were never “duly filed” because he had never signed them. Moreover, the United States contended that although Mr. Castro had signed them, he lacked proper authority to do so.
II. The Amended Returns were not “Duly Filed”
The Court held in favor of the United States. Specifically, the Court reasoned that the 2013 and 2014 amended returns were not “duly filed” returns. In this regard, the Court stated:
For a claim to be valid and duly filed, the governing regulation requires that the claim’s “statement of the grounds and facts must be verified by a written declaration that it is made under the penalties of perjury.” 26 C.F.R. § 301.6402-2(b)(1) . The IRS’s regulation requires that taxpayers submit their returns, amended returns and refund claims in accordance with the requirements listed on each type of form. See 26 C.F.R. § 301.6402-2(a)(2) (“[I]f a taxpayer is required to file a claim for credit or refund using a particular form, then the claim, together with appropriate supporting evidence, shall be filed in a manner consistent with such form, form instructions, publications, or other guidance found on the IRS.gov Web site.”); 26 C.F.R. §§ 301.6402-2(c), 301.6402-3 (identifying Form 1040X as the required form for an amended return). Form 1040X requires the taxpayer to sign under penalties of perjury that the amount claimed for refund is correct. (See, e.g., ECF 25-1 at 3 (Mr. Dixon’s 1040X).) Taxpayers may authorize, through a power of attorney or other means, fiduciaries to sign and submit returns or refund claims on their behalf. 26 C.F.R. § 301.6402-2(e). Any return or refund claim submitted by a fiduciary, however, must have attached a valid power of attorney, such as a Form 2848. Id.
After reviewing the regulatory guidance, the Court concluded that the amended returns would have been “duly filed” only if Mr. Castro submitted them with a properly executed power-of-attorney (i.e., Form 2848) or other letter (or, of course, if Mr. Dixon himself had signed them). Moreover, the Court noted that even if the Form 2848 had permitted Mr. Castro to act on Mr. Dixon’s behalf, it would not be effective because the Form 2848 did not have the box checked to authorize Mr. Castro to sign the returns.
The Court also held that Mr. Dixon’s later attempt to cure the procedural defect in December 2019 by submitting a corrected Form 2848 was insufficient. Specifically, the Court concluded that the jurisdictional requirement was necessary at the time the complaint was filed and could not be cured by later actions. Thus, the Court dismissed Mr. Dixon’s complaint.
The result in Dixon is an unfortunate one. Because the statute of limitations to claim the refund has expired, Mr. Dixon will almost certainly never receive his refund. For tax professionals who will file refund claims in the future, the lesson in Dixon is to ensure all procedural and regulatory requirements related to the refund claim have been met, particularly prior to the statute of limitations period for filing the refund claim.
Need assistance in managing the Tax Compliance process? With our unique substantive and procedural knowledge, we can provide a comprehensive approach to the tax dispute resolution process, often collaborating with clients’ existing tax professionals to formulate creative solutions to the most complex tax problems. Freeman Law offers value-driven legal services and provides practical solutions to complex tax issues. Schedule a consultation now or call (214) 984-3000 to discuss your tax concerns and questions.