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Stolen Checks and Refunds –Follow up on Hill v US

Posted on Aug. 28, 2014

Last week I wrote about the case of Hill v US, where a prisoner named Mark Hill sought justice in the Court of Federal Claims when IRS issued his refund check to another Mark Hill. The other Mark Hill was also in prison, and prison officials mistakenly gave IRS correspondence with identifying taxpayer information to that other Mark Hill. Armed with that information, the soon to be released from prison other Mark Hill contacted the IRS, provided IRS with his address for IRS to reissue a check, and cashed the check.

The aggrieved original Mark Hill attempted to get a new check from IRS. After not getting IRS to reissue the check, he sued in Court of Federal Claims. In the post, I discussed how the Court of Federal Claims analyzed the jurisdictional issues under IRS’s obligation to refund an overpayment 28 U.S.C. § 1346(a)(1) and a taxpayer’s cause of action to seek a replacement check under 31 USC § 3343(b). In this post I return again to the jurisdictional issues in the case, as there are some cases that Hill did not refer to that identify 3343(b) as the exclusive means to get federal court jurisdiction when IRS has issued a refund check that is stolen.

I have not spent much time in the procedural world relating to stolen refunds and identity theft. The issue is a major problem for IRS, resulting in major IRS initiatives (summarized here), and DOJ prosecution initiatives (summarized here). Many schemes are sophisticated and involve international organized syndicates, as TIGTA reported last year.

The identity theft TIGTA reports on differs materially from the matter in Hill. TIGTA states that identity theft “for the purpose of tax fraud occurs when an individual uses another person’s name and Taxpayer Identification Number (generally a Social Security Number (SSN)) to file a fraudulent tax return to obtain a fraudulent tax refund.” With respect to this type of identity theft, TIGTA has reported on the challenges to the tax system; TAS often highlights issues relating to the harm that the fraud causes on innocent taxpayers (see, for example, 2014 testimony of the NTA to House Subcommittee on Financial Services and General Government of the Appropriations Committee earlier this year, starting at around page 16).

The issues in Hill v US are somewhat more straightforward than some of the issues presented in the identity theft cases TIGTA and TAS have written about. Nonetheless the jurisdictional issues are a bit more subtle than perhaps reflected in the case or my original post. As I mentioned last week, cases involving a stolen paper check generally implicate 31 USC § 3343, which addresses lost or stolen and subsequently forged and paid checks issued by the Treasury. There is a one-year limit on presentment of claims for replacement of forged checks under 31 U.S.C. § 3702(c)(1); see also 31 C.F.R. § 245.3(a) (2001). The Secretary also has a statutory remedy against the depositary bank that paid a Treasury check on a forged endorsement, subject to the statute of limitations provided in 31 U.S.C. § 3712(a)(1).

In contrast, if the taxpayer has not received his tax refund check stemming from an original return, a taxpayer can make inquiries about his check but can also sue in either district court or court of federal claims. Since an original return claiming a refund constitutes a refund claim, taxpayers who fail to receive a check from IRS from an original return may file a suit in district court or the Court of Federal Claims if they did not receive their refund within six-months of filing the claim. If IRS never issued a claim disallowance, taxpayers have an indefinite period of time to bring the suit in federal court (In matters with no claim disallowance, there had been some cases indicating that there would be an outside sol on filing a refund suit; in Chief Counsel Notice 2012-012 IRS confirmed that in its view a taxpayer may file refund suit under Section 7422 at any time at least six months after the filing of an administrative claim when the IRS has not previously issued a notice of claim disallowance and the taxpayer has not waived the requirement to receive that notice).

Courts other than Hill have found, however, that taxpayers who fail to receive a refund check that was directed to the claimant from an original return due to misconduct of a third party (such as theft) are not entitled to bring refund suits for the amount of the original misappropriated check. Rather, those taxpayers must pursue an administrative claim with the IRS for check reissuance and if not successful bring an action in federal district court or the Court of Federal Claims for the issuance of a new check.

The issue implicates the IRS’s procedural regulations under 301.6402-2(f)(1)(f). This regulation provides that when mailing checks, the “checks may be sent direct to the claimant or to such person in care of an attorney or agent who has filed a power of attorney specifically authorizing him to receive such checks.” While the regulation does not identify how the IRS determines the proper address, where IRS has sent checks to the address on the return or POA, and the checks have subsequently been misappropriated, cases such as the 1990 Tax Court case of Abeson v Commissioner and the Fifth Circuit case of Your Insurance Needs Agency v US have found in those circumstances that IRS has satisfied its obligation to issue a refund and taxpayers have to pursue a remedy under 3343.

The Your Insurance case illustrates the point. In that case, Earl, the sole shareholder of Your Insurance, hired CPA David Shand to prepare and file Earl’s and Your Insurance’s tax returns. Shand overstated the liability on all these returns and either had Earl sign them or signed them himself with Earl’s permission. Earl paid the overstated amounts, then Shand altered the returns to reflect the correct, lesser amounts and inserted his own address, allowing him to receive and convert the tax refund checks to his own use. Earl learned of the scheme in 1994, and, two years later, filed requests that IRS issue replacement checks. The IRS refused, arguing that they sent the replacement checks in good faith to the addresses listed on the returns and that Earl should have sought replacement checks from the Financial Management System, where they handled stolen Treasury checks.

Ultimately, Earl missed the 1 year statute of limitations for seeking a replacement check under 31 USC §§ 3343, 3792(c)(1) and 31 CFR § 245.3(a) (2001). Even under equitable tolling (though the court did not state whether equitable tolling would apply in these cases), Earl did not file his claim within 1 year of learning of Shand’s scheme. Thus, Earl pursued a claim for a replacement check “dressed up” as a claim for a refund under 28 USC § 1346(a)(1). As a result, the court found that the “[g]overnment fulfilled its obligation to pay the taxpayers refunds by timely issuing refund checks to the address provided on their returns.   The taxpayers thereafter failed to timely file claims for replacement checks within a year of learning that their refund checks were stolen and negotiated on forged endorsements by their accountant, much less within a year of the refund checks’ issuance.   That failure does not obligate the Government to refund tax overpayments where it has already once taken all the steps required to issue refund checks.”

It is possible that in situations where IRS has failed to exercise reasonable diligence or has otherwise contributed to the taxpayer’s failure to receive a refund check that is stolen that a court may find that the IRS has not sent a check “direct to the claimant” as the regulations require. Perhaps then a taxpayer may be entitled to bring a refund suit when a check has been stolen or lost. Why does it matter which provision the court uses to determine its jurisdiction? As Your Insurance indicates, there are differing time requirement for bringing a 3343 claim as compared to a refund claim. Moreover, 3343 does not independently confer interest to a recipient, unlike the Code, which provides for interest on overpayments.

It really did not matter much in Hill which hook the court chose to hang its jurisdictional hat, as the amount of the refund was small enough so that any additional interest that Hill might have been entitled to on top of the interest embedded in the stolen check was minimal. In addition, there was no doubt as to the timeliness of his claim under either provision –though the court’s discussion of Hill’s informally filing a refund claim through correspondence seems off the mark as his original return itself was a refund claim.

The Hill case reminds me that there is a lot for me to learn about the challenging procedural issues in cases involving refund theft. I hope to return to some of these issues in future posts.

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