Schik v. United States

Background

The IRS issued Walter Schik a penalty notice in 2016 concerning Forms 5471, information returns relating to certain foreign corporations, for tax years 2000 through 2015. The IRS later assessed $552,300 in penalties against Schik for tax years 2000 through 2013. In November 2017, the IRS applied $552,300 of an overpayment from Schik’s 2016 tax return to the unpaid penalty balance.

Before and after the assessment, Schik’s audit counsel sent letters to the IRS disputing the penalties. The letters argued that Schik was not required to file the forms for Tikva Consulting and that any failure to file resulted from reasonable cause. In February 2018, Schik also submitted Forms 5471 for some years under protest and again asked the IRS to abate the penalties. The opinion states that the IRS did not directly respond to these letters. The exact date on which the IRS collected the penalties was unclear from the record.

Schik filed this lawsuit against the United States on September 29, 2020, seeking a $552,300 refund, plus attorneys’ fees, costs, and interest. He alleged that the IRS improperly collected the overpayment and applied it to the penalties.

Motion and arguments

The Government moved to dismiss under Federal Rule of Civil Procedure 12(b)(1), which permits dismissal when the court lacks subject-matter jurisdiction—the legal authority to hear the case. The Government argued that tax-refund suits require a taxpayer to file a valid administrative refund claim with the IRS before filing in court.

Schik did not dispute that he had not filed a formal refund claim before bringing the lawsuit. He argued, however, that his correspondence with the IRS qualified as informal refund claims and that the IRS had waived the formal filing requirements by considering and rejecting his arguments. In opposition to the motion, Schik also stated that he had filed a later “protective” claim on Form 843 and asked the court either to stay the case while the IRS considered it or to order expedited IRS review.

Court’s analysis

The court explained that 26 U.S.C. § 7422(a) bars a tax-refund suit until the taxpayer has duly filed a refund or credit claim with the IRS. The court stated that a claim must also be filed within the statutory time limits. It concluded that Schik had not filed a formal administrative refund claim for any of the penalties before filing suit. The court further stated that Form 843 appeared to be the required form for these penalty-refund claims and that Schik had not timely filed it.

The court rejected Schik’s informal-claim argument. An informal claim may preserve a taxpayer’s position if it is later perfected by filing a formal claim, but the court found that Schik had not shown that he timely perfected any of his letters. The court did not decide whether the letters independently satisfied all requirements for informal claims because the lack of timely perfection was sufficient to resolve the motion.

The court also rejected the waiver argument. The November 2017 notice did not mention Schik’s letters or show that the IRS had specifically considered the claims described in them. The record also did not show direct IRS responses to the letters. The court therefore found insufficient evidence that the IRS had accepted and treated the correspondence as refund claims while dispensing with the formal requirements.

The court declined to stay the case or order the IRS to process Schik’s post-lawsuit Form 843 claim on an expedited basis. It stated that the IRS has its own procedures for handling valid refund claims and that Schik cited no legal support for the requested relief.

Disposition

The court granted the Government’s motion to dismiss. It dismissed the case for lack of subject-matter jurisdiction under Rule 12(b)(1) and dismissed the case without prejudice. The Clerk of Court was directed to close the case. The court did not decide whether the IRS’s penalties were properly assessed or collected.