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“Refunds” and CDP Review

Posted on Jan. 25, 2023

In a post months ago, I wrote that if the IRS improperly levied on a state tax refund by failing to give required notice, I would ask for the money back in the CDP hearing. In the comments to my post, I was promptly reminded of the Tax Court’s lack of “refund jurisdiction” as well as its (possible) lack of injunctive power to order a return of the improperly levied funds.

In response, I started writing about why I don’t think that the lack of refund jurisdiction or lack of injunctive power ends the conversation or dooms my argument: in other words, that even without a Tax Court order, I still think I’d have a decent chance of getting my money back if the IRS (clearly) improperly levied and I raised that issue in a CDP hearing. Then life happened and the post got put on the back burner. In the interim, however, another CDP case caught my eye: Schwartz v. Commissioner, T.C. Memo. 2022-125. The opinion is interesting for a number of reasons, but for me it really drives home two points: the power of framing the issue, and the functional ability of the Tax Court to fix problems in CDP even if it cannot “order” certain relief from the IRS. More below the fold:

The Power of Framing

In CDP review, quite a lot hinges on how you frame the issue (and your proposed relief) to the Tax Court. Frequently this comes up in the context of disputing the underlying liability. Depending on exactly how you frame your issue (more accurately, how the Tax Court interprets the issue), you may get de novo review instead of abuse of discretion: that’s the crux of the precedential Melasky case covered here (with links to additional coverage therein). (Note also that if it is a pure merits issue you may not even be able to raise it at all (see, for example posts here and here).

Context matters in determining the proper way to frame an issue. I’ve posted on this previously, with regards to summary judgment motions. But I’ve also posted about how in CDP the seemingly straightforward argument “I don’t owe the tax” can be framed in different ways. The Tax Court could look at that as a “merits” argument (disagreeing with the calculation of the tax) or a “procedure” argument (disagreeing with the IRS books for continuing to show an outstanding liability).

Which brings us to Schwartz, which is something of a hybrid between the two.

In Schwartz, the taxpayer (led by estimable counsel Karen Lapekas) essentially argued that they “don’t owe” for the years at issue because they had a credit-elect under IRC § 6402(b) that would wipe out each liability. For more on the many nuances of credit-elects, see posts here, here, and here. For our purposes, all that you need to know is that the taxpayer claimed they overpaid for 2005, applied that overpayment to the next year (i.e. the “credit elect”), and that resulting overpayment for 2006 was applied to the next year… and so on and so on in a cascade, that effectively resulted in no balance due for any of the years before the Tax Court.

I highly recommend reading the opinion for details both on the metaphysics of credit-elects, and the “informal claim doctrine” (see posts here and here). Those were the substantive issues that Judge Vasquez spent most of his time wrestling with. I’m going to largely ignore them to focus on a procedural issue that Judge Vasquez… didn’t quite ignore, but definitely sidestepped.

When a taxpayer says “I don’t owe” in a CDP case, and the reason they “don’t owe” is a credit elect, what is the standard of review? There are definite undertones of merits issues/challenges to the liability (it is a “credit” that is claimed on a tax return after all) and procedure (that “credit” happens to be in Subtitle F, which covers procedure and it really is just the application of a payment).

The Tax Court hasn’t quite made up its mind on how that works with credit-elects. Judge Vasquez notes that in one case (Landry v. Commissioner, 116 T.C. 60 (2001)) the Tax Court applied de novo review to a credit elect issue. However, later in the aforementioned Melasky case, the Tax Court applied abuse of discretion review to the dispute over whether a payment was properly credited to the taxpayers account -which is pretty fundamentally similar to a credit elect. What to do here…

Fortunately, Judge Vasquez determined that he didn’t need to reach that question because the IRS would lose on abuse of discretion or de novo review… that tends to happen, I suppose, where the judge finds that IRS Appeals erred on a consequential matter of law.

Ultimately, Judge Vasquez finds that Mr. Schwartz had a valid credit-elect for some years (2006 and 2007) but that the record wasn’t sufficient to show that the carryforward “cascaded” to later years (2010 – 2012). Because of this, the IRS proposed levy action is “not sustained” for 2006 and 2007, but is for 2010 – 2012.

Why Schwartz Matters: A Refund By Any Other Name?

I think it is important to consider what the Tax Court functionally did in this case. Effectively, it determined an overpayment for multiple years. I really don’t think you can get around that conclusion for the concept of a cascading credit-elect to make any sense.


Maybe that’s no big deal: the Tax Court even hinted as much in Greene-Thaepedi that it might determine overpayments in some circumstances (see footnote 19). Also, one could say that in Schwartz the Tax Court was only looking at the timing of an overpayment, and didn’t determine the amount. Further, in Schwartz, the Tax Court didn’t order a “refund,” which is what we really care about.

(It’s also worth highlighting that it was Judge Vasquez (with Judge Swift joining) who dissented in Greene-Thapedi, believing that the Tax Court did, in fact, have something akin to refund jurisdiction. In that regard, Schwartz may have had had a “good draw” on the judge deciding his case.)

But Schwartz definitely doesn’t conflict with Greene-Thapedi, and I’d suggest the most important reason why is this: a refund is different from a determination of overpayment. An “overpayment” is a determination that the taxpayer had more credits/payments than tax. A “refund” occurs when the excess is sent to the taxpayer. See IRC § 6402(a). A lot of people have “overpayments” but still don’t end up with “refunds.” That’s because they owe other back taxes, child support, student loans… or perhaps choose a credit-elect rather than a refund.

(For more on the contours of overpayments and refunds, I would recommend an older article from Professor Bryan Camp found here. I have returned to it again and again when dealing with the metaphysics of refunds, assessments, and all other forms of tax procedure geekery ordinary people dare not dream of.)

But even if there was only the determination of an “overpayment” and not the order of a “refund,” in Schwartz, I think it holds another important lesson. And that lesson is this:

Court opinions have consequences.


Well duh, you reply. But what I’m getting at is that an “opinion” can carry consequences even if it isn’t followed by a particularly useful “order.”  In other words, even if the Tax Court doesn’t have “refund jurisdiction” in CDP to “order” refunds, it may nonetheless have a functionally equivalent power when it determines that the IRS erred as a matter of law.

To illustrate, imagine that the Tax Court issues an opinion finding that the IRS erred in failing to credit $5,000 to a taxpayer’s $2,000 liability. As we’ve seen in Schwartz, even in CDP cases the Tax Court can clearly make such a determination. What the Tax Court (arguably) cannot do is follow that opinion with an order that the IRS refund the taxpayer $3,000. But the Tax Court can remand for abuse of discretion on proposed collection of a non-existent liability.

And what happens next?

In my next two posts I’ll explore that question and dive again into just how close to getting a “refund” you can get in CDP even without “refund jurisdiction” in Tax Court.

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