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Late Filed Erroneous Refund Suit

Posted on Apr. 22, 2021

In United States v. Page, No. 3:20-cv-08072 (D. Ariz. April 16, 2021) the court holds that a large erroneous refund the IRS sent to the taxpayer could not be recovered because the Department of Justice filed the erroneous refund suit too late.  The issue of when the statute begins to run for the bringing of the suit was front and center in the case.  When the IRS issues an erroneous refund and realizes it has done so, it first must decide if the refund is a rebate or non-rebate erroneous refund.  A Chief Counsel service center advice memo linked here does a good job of explaining the two types of erroneous refunds.  It also discusses other ways, such as offset, the IRS could recover the funds.

The answer to the question of what type of erroneous refund occurred will drive the next move of the IRS since it can decide to collect rebate refunds administratively but must bring a suit to collect non-rebate refunds.  Assuming that the erroneous refund meets the non-rebate criteria, it must bring the suit within two years of the erroneous refund or five years after the non-rebate erroneous refund if the refund was procured by fraud.  Sean Akins wrote a guest blog a few years ago you can read here on an erroneous refund in which the IRS alleged fraud and lost which caused it to fail to recover the erroneous refund given the timing of the suit.

In the Page case the IRS does not assert fraud.  So, the two-year rule applies but the question raised concerns the timing of the start of the two-year period.  On May 5, 2017, the IRS mailed to Page an erroneous $491,104.01 tax refund check.  Perhaps he spent most of the next year contemplating whether to cash the check and reading blogs like the ones recently written by Caleb Smith or perhaps postal delivery in his area was very slow.  For some reason he did not cash the check until April 5, 2018.  I pause to say I am mildly surprised he could cash the check that much after the date of the check.  I thought the checks had a 180-day time limit and I seem to remember something about the UCC rules regarding the timing of the presentment of checks but those issues were not present in the case.

After Page cashed the check, the IRS wrote him a polite note advising him that it sent the check in error and requesting that he return the money. In response to the letter, Page did return $210,000 on December 19, 2019, but not the rest. In the erroneous suit filed on March 31, 2020, to recover the remaining amount of the erroneous refund, the IRS alleged that he retained the balance of the check for his personal use and enjoyment. Page did not respond to the complaint. It is unclear if he was unavailable because he was in the midst of enjoying the refund, hunkered down because of the pandemic or some other reason. The clerk entered a default; however, under Federal Rule of Civil Procedure 55 the court had to decide whether to enter a default judgment. In making this decision the court considers the following factors:

(1) the possibility of prejudice to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3) the sufficiency of the complaint, (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect, and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.

The court notes that IRC 6532(b) provides that recovery of an erroneous refund “shall be allowed only if such suit is begun within 2 years after the making of such refund.”  Under Ninth Circuit precedent “the refund is considered to have been made on the date the taxpayer received the refund check.”  The court further notes that although the statute of limitations is normally an affirmative defense that must be raised by the defendant or be waived, the court can raise it sua sponte in certain circumstances where the facts are clear from the pleading filed by the plaintiff.

The complaint filed by the government alleges when it mailed the check but not when Page received it. The court finds that it defies common sense “to belief it took 330 days for Page to receive the check in the mail.” (The court has not read the Castillo case now pending in the Second Circuit discussed briefly here where the letter still shows up in the postal records as undelivered much more than a year later.)  

The IRS argues that the statute of limitations does not begin to run when Page received the check, whenever that was, but rather begins to run when he cashed the check on April 5, 2018 making the suit filed within the two-year period. It acknowledges that there are cases in which courts, including the Ninth Circuit held that the time begins to run upon receipt by the recipient of the erroneous refund check but argues that these cases did not consider whether the better date would be the date of the cashing of the check. Here, Page gets a significant benefit of shortening the window of time for the IRS to bring suit by holding the check, assuming he received it, for almost a year before cashing it. In pushing back on the prior holding in the Ninth Circuit the government argued:

the government directs the Court to United States v. Commonwealth Energy Sys. & Subsidiary Cos., 235 F.3d 11 (1st Cir. 2000), and United States v. Greene-Thapedi, 398 F.3d 635 (7th Cir. 2005). Both cases characterized the Supreme Court’s statements on the issue in O’Gilvie as dicta and, consequently, did not consider O’Gilvie binding. In Commonwealth Energy, the First Circuit also declined to follow Carter, explaining that Carter “assumed, without elaboration, that the date a refund is ‘made’ is the date it is received, and did not address the important policies which [the First Circuit] considered in choosing between the date of receipt rule and date of clearance rule.” 235 F.3d at 14. Instead, Commonwealth Energy concluded that the statute of limitations began to run “at the time the check cleared the Federal Reserve and payment was authorized by the Treasury” and observed that “[u]sing the check-clearing date here both satisfies the rule that we construe statutes of limitations in favor of the Government and provides a certain limitations date by which the Government must abide.” Id. In Greene-Thapedi, the Seventh Circuit adopted the holding of Commonwealth Energy and dismissed Carter as “just another case in which the court was presented with a choice between the date of mailing and the date of receipt.” 398 F.3d at 639.

The district court finds that it is bound by the prior Ninth Circuit precedent. In balancing the factors, it decides to deny the IRS motion for default judgment.

The case sets up a conflict between the circuits if the Ninth Circuit sticks to its prior holding in the face of the arguments by the IRS.  Because of the possibility that it could convince the Ninth Circuit to refine its prior opinion or the possibility of a creating a clear circuit split it could take to the Supreme Court, perhaps this case will be appealed by the IRS.  The government never knows exactly when a taxpayer receives an erroneous refund that it sends.  It does not send erroneous refunds by certified mail.  If the decision here prevails, the IRS must bring the erroneous refund suit within two years of the date it mails the check in order to be certain that it meets the deadline.  Maybe that’s enough time but I think it will want more time than that, given the time it takes to discover the mistake and take the necessary steps to initiate the suit.

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