IRS Errors You Need to Know How to Handle Erroneous Refunds
Occasionally, The IRS makes mistakes and issues refund checks to taxpayers by mistake. When the IRS identifies these errors, it typically attempts to recover the funds informally first. However, if these attempts are unsuccessful, the government can file a lawsuit in federal court to claim the erroneous refund.
The government does not have unlimited time to file these lawsuits. Section 6532(b) of the Internal Revenue Code provides that “recovery of an erroneous refund by lawsuit…shall be permitted only if such lawsuit is commenced within two years of the making of such refund,” unless the refund was caused by fraud or misrepresentation. In the latter cases, the limitation period is extended to five years.
Legal Deadlines for IRS Erroneous Refund Claims
A recent case in the Ninth Circuit addressed a new issue related to the two-year statute of limitations under section 6532(b). In United States v. Page, No. 21-17083 (9th Cir. June 26, 2024), The IRS sent Jeffrey Page a $500,000 refund check on May 5, 2017due to an administrative error. In fact, Page should have received a refund of approximately $4,000.
Page did not immediately deposit the check; Instead, she waited a year and collected it on April 5, 2018. The IRS eventually discovered the error and requested the funds be returned. Page returned about half of the refund and kept the rest.
Judicial procedure and judicial decision
On March 31, 2020, the government filed suit against Page to recover the remaining balance. Page did not respond to the complaint and the government sought a default judgment.
In determining whether default judgment was appropriate, the district court questioned whether the The IRS had met the 2-year statute of limitations under section 6532(b). The IRS argued that the 2-year period should be counted from the “check clearance date.” The district court disagreed and dismissed the suit as untimely.
On appeal, the Ninth Circuit reversed the district court’s decision. The appeals court noted that the Supreme Court had previously determined in two separate decisions that the payment triggers the statute of limitations.
Although the Supreme Court did not specify whether payment meant receipt of the check or transfer of funds, the Ninth Circuit reasoned that requiring the statute of limitations to run from the date the check cleared provided a clearer rule.
Differences between judicial circuits
The Ninth Circuit also noted that a different interpretation would create a disparity among the judicial circuits. In US v. Commonwealth Energy Sys. and Greene-Thapedi, the First and Seventh Circuits, respectively, concluded that the statute of limitations under section 6532(b) began to run from the date the check was cashed by the Federal Reserve Bank.
Implications for taxpayers
The Page decision underscores the Importance of the “check clearing date” under section 6532(b) for erroneous refunds. Although the refund at issue in Page appeared to be a clear administrative error, the government can make erroneous refund claims in other contexts, including simple disagreements with the taxpayer over whether a refund is actually owed.
In these situations, taxpayers should recognize that time begins to run only after the funds are cleared and deposited into the taxpayer’s bank account, not from the date of the check or the date the taxpayer receives the check.
To avoid problems In the case of erroneous refunds, it is critical that taxpayers keep accurate records and pay attention to any communications from the IRS. If an unexpected or incorrect refund is received, it is advisable to contact the IRS immediately to clarify the situation and avoid future legal complications.
Additionally, understanding the legal deadlines and applicable rules can help taxpayers better manage any disputes with the IRS. Clarity on when the statute of limitations begins can be crucial to defending a case or negotiating a settlement.
Proper handling of erroneous refunds by the IRS and knowledge of the legal deadlines set forth in section 6532(b) are essential for both the government and taxpayers.
The recent decision in the Page case provides clear guidance on how the limitation period should be calculated, establishing that it begins from the date of settlement of the check.
This interpretation provides greater clarity and consistency in the application of the law, which benefits both parties in potential future disputes. Staying informed and acting promptly in the event of errors can save time and resources, ensuring a smoother and fairer process for everyone involved.
