Today, I discuss a pair of recent decisions out of California that starkly contrast the different approaches courts take to the sufficiency of pleadings and to the particularly special circumstances created by the financial disability exception to three year refund period.
This discussion comes just a month after my recent post on this topic. There, I wrote about the decision in Ruebsamen v. United States in which the Court of Federal Claims denied a pro se taxpayer the right to bring a refund suit because he failed to state a claim. The IRS successfully argued that Rev. Proc. 99-21 requires that the taxpayer’s initial administrative claim for this disability exception to the refund period must include documentary support for the claim. Since the pro se taxpayer did not attach any support to his claim, the Court tossed him out.
Like a lighthouse on the California coast, the Northern District of California’s Order in Subbiah et al v. IRS is the welcome beacon on the other side of this issue. There, a married couple – each of whom had to surmount the financial disability hurdle – filed their joint tax return after the expiration of IRC 6511(a)’s three year refund period. I emphasize that each taxpayer had to overcome the refund period bar because Rev. Proc. 99-21, which explains how the IRS chooses to interpret IRC 6511(h), states, “a taxpayer is not considered to be financially disabled during any period in which the taxpayer’s spouse or any other person is authorized to act on behalf of the taxpayer in financial matters.” In the District Court, these pro se plaintiffs survived the IRS’s motion to dismiss for failure to state a claim and may now proceed to prove that their late-filed refund claim should succeed. According to the Order, each taxpayer was incapacitated – one because of “severe ill health,” and the other because she “was incapacitated by her lack of knowledge of the couple’s finances as well as her own financial and time constraints during the relevant time period.” The Court did not discuss where it obtained this information, and it is unclear whether the taxpayers had submitted any documentary proof alongside their initial administrative claim. However, in scheduling the case to move forward, the Court invited these plaintiffs to prove their claim. In thinking about the Court’s brief Order, I note that it may be introducing another factor to consider in the 6511(h) analysis, and that is whether lacking the mental acuity necessary to participate meaningfully in tax return preparation matters may be a factor in determining the success of a financial disability claim. And this makes me wonder if the Court is considering whether taxpayer knowledge of tax matters, such as that found in IRC 6015, may be finding a foothold in this area of litigation.
The plaintiff in Barbeau v. IRS, No. 2:21-cv-08544 (C.D. Cal. 2022), down the road in the Central District of California, couldn’t have had a more opposite result.
There, the court dismissed Ms. Barbeau’s case for lack of jurisdiction because she did not attach all of the information required by Rev. Proc. 99-21 to her late filed refund returns. And here is why the revenue procedure’s requirement is so cruel.
Ms. Barbeau claimed she was late in filing her returns because of domestic abuse. The court describes her allegations:
Plaintiff’s Federal tax returns for the years 2012, 2013, and 2014 were filed late due to plaintiff’s severe mental and physical impairment from an abusive relationship she was in, causing her to have mental breakdowns, severe anxiety, panic attacks and illness. Plaintiff’s abuser hid her mail, including all mail from defendant [IRS].
In a later paragraph she further alleges that she filed the three late returns “[u]pon improvement of her situation.”
Assuming these allegations are true, the Court – and the IRS – treated this survivor of domestic abuse with utter callousness.
Ms. Barbeau filed her three late returns on April 16, 2019. In October and November of 2019, in three separate notices, the IRS formally disallowed her refund claims. She protested each of the notices of claim disallowance and included “partial physician notes regarding an April 29, 2012 emergency room visit, and a letter dated December 2, 2019 from an individual identified as a ‘training facilitator’.”
In dismissing her case, the court stated:
Plaintiff here failed to “strictly comply” with the requirements of Revenue Procedure 99-21 . Schmidt v. IRS, No. 20-2336, 2021 WL 4480718 (E.D. Cal. Sept. 30, 2021) (“To take advantage of this provision, a taxpayer must strictly comply with its requirements.”) (internal quotations and citations omitted), report and recommendation adopted sub nom. Schmidt v. United States, 2021 WL 5601327 (E.D. Cal. Nov. 30, 2021). Revenue Procedure 99-21 requires the statements described above “to be submitted with a claim.” Rev. Proc. 99-21 § 4 ; see also Schmidt, 2201 WL 4480718
(“As set forth, Rev. Proc. 99-21 requires that both the physician’s statement and the taxpayer’s statement be submitted with the taxpayer’s refund claim.”). Plaintiff filed her claim on April 12, 2019, but did not submit her own written statement until December 2, 2019, (Ex. E, FAC), and the physician’s statement until July 14, 2020. (Ex. B, FAC); see also Adams v. IRS, No. 13-04525, 2014 WL 457915 (C.D. Cal. Feb. 3, 2014) (“[P]laintiffs have not alleged a basis for the suspension of these limitations period because they allege they did not provide information regarding [the taxpayer’s] disability at the time they filed the claims.”). Moreover, Plaintiff cannot assert substantial compliance as “there [was] no physician statement whatsoever” at the time she filed her claim. See Reilly v. United States, No. 14-07936, 2015 WL 5305210 (C.D. Cal. Sept. 10, 2015). Accordingly, as Plaintiff’s claim is not tolled, the three-year limitation is a jurisdictional bar to her refund claim. The Court thus GRANTS Defendant’s Motion to dismiss Plaintiff’s refund claim.
The irony in the IRS’s position in this case is that the IRS is well aware of the multitudinous challenges survivors of domestic abuse must face as they find stability. This is revealed in Rev. Proc. 2013-34, which contains a robust definition of domestic abuse, and which was developed with public input through notice and comment, as well as with strident advocacy by the former National Taxpayer Advocate. The Rev. Proc.’s definition of abuse mirrors the evidence Ms. Barbeau began to obtain: “Abuse comes in many forms and can include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate the requesting spouse, or to undermine the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws.”
Leaving this Rev. Proc aside, the Tax Court has also instructed the IRS on myriad ways in which abuse affects taxpayers. In Nihiser v. Commissioner, T.C. Memo. 2008-135, the Tax Court held that “psychological mistreatment in the absence of physical harm [can] be “abuse.”” Psychological abuse (mental, emotional, verbal) can impact someone in a similar manner to physical abuse. Accordingly, the Tax Court noted in Stephenson v. Commissioner “that requiring petitioner to inquire into whether [their spouse] reported on the return the income she earned could have put her at risk of abuse. Petitioner’s efforts to become more informed of what she was signing and questions about their finances in general resulted in threats of violence or verbal abuse from [their spouse].” Moreover, the Tax Court in Drayer v. Commissioner explained that abuse impacts each taxpayer differently but can include, among other things, social isolation, exhaustion, humiliation, demoralization, forced use of drugs or alcohol and the degradation of “the victim’s ability to reason independently.”
Shame on the IRS for not opening the door wider for taxpayers such as Ms. Barbeau. Its litigating position in her case lays bare the agency’s insensitivity to taxpayers whose lives are complicated and painful through no fault of their own, and yet who endeavor to be compliant.
Again, I call on the IRS to give the public the right to comment on Rev. Proc. 99-21. In the quarter century since the passage of IRC 6511(h) giving individuals with financial disability the right to file a late claim under certain circumstances, the IRS has never issued regulations and has never engaged with the public regarding how it might administer the claims of this class of individuals.
Again, I suggest that the IRS establish a unit to facilitate claims of individuals claiming financial disability. Shielding itself behind procedural mechanisms denies taxpayers the chance to pursue their claim and thwarts the statute’s purpose.
Again, I wonder how many pro se taxpayers’ claims are denied merely because they were not attuned to a revenue procedure when they filed their claim.