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A Stolen Check, Mistaken Identity and Prisoners

Posted on Aug. 22, 2014

Rarely does a title to a post in a tax procedure blog sound like it might make a good movie. Today’s post? Well maybe. This post considers Hill v US, a case from the Court of Federal Claims involving a prisoner named Mark Hill whose $1182 tax refund was stolen and cashed by another prisoner with the same name after the prison system mistakenly delivered an IRS letter relating to the missing refund check to the wrong Mark Hill. With time on his hands, but no check, the right Mark Hill sought justice in the form of a new check. After getting the runaround from the IRS, the right Mark Hill sued the US to force it to issue a new refund check. For good measure, he also wanted interest and punitive damages.

The case involves some interesting procedural issues, including when a taxpayer’s correspondence may constitute an informal refund claim and whether the Court of Federal Claims has jurisdiction to consider stolen refund checks under 31 USC 3343 rather than the normal refund jurisdictional provisions. 31 USC 3343 deals with stolen Treasury checks generally and not tax refund checks specifically, and I had not considered it as a possible lever to get into court with the all too common problem of stolen tax refunds.

Cases involving prisoners often raise interesting tax procedural issues. Our most prolific guest blogger Carl Smith previously blogged about some of the issues in Timely Filing a Tax Court Petition From Prison. Hill raises different issues, though not necessarily ones specific to prisoners, namely how to get a refund check that someone else may have improperly taken. The facts in Hill show how challenging it is to get a refund when someone steals the check (a not uncommon problem). Here is what happened to lead up to the lawsuit.

Mark Hill received a letter from IRS in August 2008 saying that while it had received his 2007 tax return, it had misplaced it. In January 2009, IRS asked Hill to send in a newly signed 2007 return. In February 2009, Hill was sentenced to an 8-year prison term. While at a temporary facility (pleasantly called a Corrections Reception Center) in March of 2009, Hill sent in a newly signed 2007 return. By April 2009, Hill left the Reception Center to take residence at a more permanent corrections facility. In June, IRS issued the $1182 refund claimed on the 2007 return, which was returned and marked by the Post Office as undeliverable.

What happened next caused the problem at issue in the case. From the opinion itself, absent citations to the record:

The IRS then issued a refund notice and requested Mr. Hill’s current mailing address. This notice was received by prison authorities who “erroneously delivered” it to another inmate also named Mark Hill (“Hill II”),although it contained Mr. Hill’s personal information, including his taxpayer identification number and social security number, which Hill II used to impersonate Mr. Hill and obtain the refund check. The IRS was contacted via its toll-free phone number by an individual who claimed the refund and provided an address in Waverly, Ohio. On July 24, 2009, the IRS issued the refund to the Waverly, Ohio address. Hill II [the other Mark Hill] subsequently cashed the check at First Check Cash Advance, endorsing it as “Mark Hill” without the middle initial, even though it was addressed to “Mark A. Hill.”

By the fall of 2009, with original Mark Hill still not having received his check, the IRS contacted him and said it issued the check in July. Having not received the check, or knowing what happened to his refund, the original Hill submitted a Form 3911, a Taxpayer Statement Regarding Refund, trying to find out what happened. Hill eventually requested help from the Taxpayer Advocate Service, which in May 2011 provided Hill a copy of the cashed check as well as the location where it was cashed.

That information caused Hill to seek a remedy and in May 2011 he sent a letter to Secretary of the Treasury, requesting assistance in obtaining his refund. That led to his getting a letter from W&I in August 2011 stating that his check was misappropriated. In September, 2011 Hill submitted affidavits of accusation “to six separate organizations to obtain the 2007 tax refund, which led to an investigation of the Chillicothe Correctional Institution, the Institution Liaison, and Investigator from the Ohio State Highway Patrol (“OSHP”). “

He also in October 2011 completed and submitted IRS forms for “Claims Against the United States For the Proceeds of a Government Check” (FMS Form 3858 and FMS form 1133), as directed by the Financial Management Service of the Department of the Treasury and the OSHP Investigator.

After getting a request from someone from IRS requesting more information, Hill filed a complaint in the Court of Federal Claims in January 2012, after almost three years of correspondence with IRS about his refund. In its answer, the government stated that Hill is “not entitled to recover for a second time any amounts that have been already paid to him by any agency of the United States,” and that “this [c]ourt has no jurisdiction to hear Plaintiff’s claim for punitive damages . . . because the United States has not waived its sovereign immunity for such claims.” It followed with a motion for summary judgment.

Court Analysis

The jurisdictional question requires consideration of the statutory scheme for refund suits. The Court of Federal Claims has jurisdiction under the Tucker Act, 28 U.S.C. § 1491, “to render judgment upon any claim against the United States founded either upon the Constitution, or any Act of Congress or any regulation of an executive department, or upon any express or implied contract with the United States, or for liquidated or unliquidated damages in cases not sounding in tort.” 28 U.S.C. § 1491(a)(1). The Tucker Act itself does not confer a substantive right to bring an action. The statutory vehicle for the substantive right is 28 U.S.C. § 1346(a)(1). That provision authorizes the Court of Federal Claims to adjudicate “[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws[.]”

The Court walked through the statutory requirements necessary to confer jurisdiction in the Court of Federal Claims for refund matters (there is concurrent refund jurisdiction in federal district courts), looking to Sections 6511, 6532 and 7422. It summed it all up as follows:

Jurisdiction is established if: (1) the taxpayer has paid his full federal tax liability for the year for which he claims a refund; (2) before filing suit, the taxpayer timely files an administrative claim for the refund with the IRS for the amount at issue; and (3) subsequently, the taxpayer timely files suit “provid[ing] the amount, date, and place of each payment to be refunded, as well as a copy of the refund claim” (citations omitted).

Just this past week, I discussed the requirement under 6511(a) for filing a refund claim within “3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later….”. In this case, the IRS seemed to acknowledge a timely (though misplaced) 2007 return. Hill thus was required to submit a refund claim by April 15, 2011. For these purposes, the court found that Hill did not submit a formal refund claim until October 12, 2011, when he submitted formal claims documents — Form FMS-3858 (Claims Document) and Form FMS-1133 (Claim Against the United States for the Proceeds of a Government Check). Nonetheless, the court treated Hill’s pattern of correspondence as establishing the submission of an informal clam prior to the April 15, 2011 deadline:

The record in this case establishes that Plaintiff made several informal claims to the IRS within the three-year period. The United States Supreme Court has held that “a [timely] notice fairly advising the Commissioner of the nature of the taxpayer’s claim . . . will nevertheless be treated as a[n effective] claim, where formal defects . . . have been remedied by amendment filed after the lapse of the statutory period.” United States v. Kales, 314 U.S. 186, 194 (1941).

This informal refund doctrine is a handy way that to avoid the strict possibly jurisdictional barrier of 6511(a) (as I alluded this week and as a comment by Carl on my post elaborated on there is an argument, however, why 6511(a) is not a jurisdictional bar and may be subject to equitable exceptions). For those wanting more on informal claims, Hill provides some examples from prior cases where the Court has found the written communication from the taxpayer was enough to put the IRS on notice.

The Hill opinion also discusses the requirements under Section 6532, which generally prevents a suit from being filed before “the expiration of 6 months from the date of filing the claim . . . unless the Secretary renders a decision thereon within that time, nor after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.” Here the formal claim was filed in October 2011, and the suit was filed in June of 2012. Since the IRS never formally disallowed the claim, there was no issue with the 2-year rule. It is possible and the court suggests that the 6-month rule in 6532 may run from submission of an informal claim (I have not researched the issue) but it would be prudent to wait at least 6 months following a submission of a formal claim to avoid an easily remediable problem.

There are a couple of other points worth highlighting. The court noted that there was a separate nontax specific statute (Tile 31 USC 3343) that created a substantive right enforceable against the US that, in combination with the Tucker Act, served as an alternate basis for the court’s jurisdiction The court summarized that provision:

To establish entitlement to relief under Section 3343, the taxpayer must establish that:

(1)          the check was lost or stolen without the fault of the payee or a holder that is a special endorsee and whose endorsement is necessary for further negotiation; (2) the check was negotiated later and paid by the Secretary or a depositary on a forged endorsement of the payee’s or special endorsee’s name; and 
(3) the payee or special endorsee has not participated in any part of the proceeds of the negotiation or payment.

The Court concluded that Hill satisfied the above and was entitled to 3343 relief. I had not thought about this provision as an alternate means of getting court review. This may come in handy if for example a taxpayer fails to meet the Internal Revenue Code-specific requirements for filing a tax refund claim or suit.

The court dismissed Hill’s claims for punitive damages but its discussion of interest is worth noting too. 3343, while authorizing replacement checks, does not allow for interest. Yet Hill sought interest. The court noted that overpayment interest is due on refunds, and allowed a limited amount of interest because the IRS in losing the return originally failed to issue Hill his refund within 60 days of the timely-filing:

Plaintiff timely filed his 2007 tax return on the “last date” for filing that return: April 15, 2008. see also 26 C.F.R. § 301.6611-1(j)(1). Interest would be allowed, therefore, if the overpayment was not refunded within sixty days, i.e., June 14, 2008. Since the IRS admitted to losing Plaintiff’s 2007 tax return, the IRS unquestionably missed that sixty-day deadline. Instead, the IRS mailed the tax refund on June 5, 2009. Thus, pursuant to section 301.6611-1(g), Plaintiff is owed interest from the date of overpayment –April 15, 2008, through at least thirty days prior to the date of the refund check — May 6, 2009, which equals 386 days, excluding the end date.

So, interest of about $7 or so will be part of what Hill should get. One more issue worth noting. Unfortunately for Hill, however, it appears that he has a debt that is subject to offset under Section 6402. In this suit, he sought a declaratory judgment that the refund/replacement check not be subject to offset. As there was no counterclaim from the government or related action in another matter, the court declined to consider the issue, considering it not ripe.

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