Taxpayers Challenging IRS Audit Results Must Raise All Issues at the IRS Administrative Level Before Filing Refund Suit
Individuals and businesses who are dissatisfied with an IRS audit, a penalty imposed, or the IRS’s refusal to issue a refund may think that, if an administrative appeal with the IRS does not go in their favor, they can move on to file a refund claim in U.S. district court and raise any new arguments or grounds for why the IRS’s decision was wrong and why the individual or business should win. But as several district courts have recently held, the variance doctrine may prohibit taxpayers from raising new issues in court that were not previously raised at the administrative level.
For instance, in Ginsburg v. United States, 123 AFTR 2d ¶ 2019-553 (M.D. Fla. Mar. 11, 2019), the taxpayer sought a refund of a 40% gross valuation misstatement penalty imposed against him. The taxpayer paid the penalty and interest and sought a refund by filing an administrative claim asserting he acted reasonably and in good faith such that the penalty should not be imposed because he relied on tax opinions and advice from CPAs and law firms. The IRS denied the claim and he sought a refund in district court. In a summary judgment motion, the taxpayer contended that, in addition to his reasonable cause reliance arguments, the penalties should not be imposed because the IRS failed to comply with section 6751(b), which requires supervisory approval of the substantial valuation misstatement penalty. The government sought to defeat taxpayer’s argument by contending that the taxpayer was barred from so arguing under the variance doctrine, because the taxpayer failed to raise this issue in his refund claim before the IRS. The court sided with the government, holding that “any subsequent litigation of the government’s denial of a refund claim is ‘limited to the grounds fairly contained within the refund claim’” as a result of the variance doctrine.
Similarly, in Bonilla v. United States, 2019 WL 1320279 (D. Conn. Mar. 22, 2019), the taxpayer was prohibited from raising an issue not contained within the administrative refund claim. In this refund suit, the taxpayer challenged the IRS’s determination that she was an owner of her ex-husband’s dissolved S corp. and therefore liable for passthrough income from another partnership in which the dissolved S corp. held an interest. The taxpayer argued that the dissolution of the S-corporation meant it could not hold the partnership interest, but the court rejected this argument because the taxpayer had not raised it in her administrative claim and it therefore impermissibly varied from her claim such that she would not be permitted to raise this argument under the variance doctrine.
These recent cases are important reminders for taxpayers seeking to challenge IRS audit results, penalty impositions, and/or denial of refund claims, and who may later find themselves in court for refund claims. If all issues or defenses have not already been raised, taxpayers may be forever barred from raising them. Accordingly, it is imperative that taxpayers strategize and fully develop a case at the administrative level to ensure no arguments are left on the table and maximize the likelihood of success on the merits of a tax appeal.
If you have questions about how you can challenge IRS audit results or whether you can file a refund claim, contact Claire Taylor.