Don’t Forget the Requirement to File an Administrative Claim for the Refund of Taxes by PHILIPP BEHRENDT
On January 11, 2023, the United States District Court for the Western District of New York ruled on the case of United States v. Chen-Baker, Case. No. 1:22-cv-256. This case provides an important reminder of the importance for individuals or organizations in filing administrative claims against the government before suing the government.
This case involves a complaint initiated by the Government to collect non-willful, civil FBAR penalties assessed against Ms. Chen-Baker. Ms. Chen-Baker, in this government FBAR collection case, counterclaimed against the Government for the refund of penalties which she paid in connection with an assessment made against her under Title 26 for failing to file forms 3520 and 8938. A quick reminder here, lest anyone forget: FBAR penalties are not taxes and the authority to assess this penalty is not found in Title 26, U.S.C., rather it is found under Title 31. Nonetheless, the IRS has been delegated the authority to assess and collect FBAR penalties.
At the heart of this case was the question of whether a counterclaimant was required to exhaust administrative remedies before filing a counterclaim against the government. The government argued that Ms. Chen-Baker had not exhausted all required administrative remedies for a refund of civil penalties assessed under Title 26 before filing her counterclaim for same.
The defendant faced a lawsuit for civil penalties because of her failure to report an interest in a foreign bank account. She failed to file the required FBAR forms for the years 2010-2013 for a Hong Kong bank account that her father opened in her name. Never being notified about deposits, withdrawals and unconscious about the account’s balance, the defendant entered the Offshore Voluntary Disclosure Program once she became aware of her FBAR obligations. The IRS assessed four $10,000 penalties for non-willful failure to file FBARS. It also assessed penalties against the defendant for failure to file Form 8938 and failure to file Form 3520. She paid the penalties with interest relating to Forms 8938 and 3520 but did not pay the FBAR penalty.
After the Government sued to collect the FBAR penalty, the defendant filed a counterclaim against the government seeking a refund for other penalties (Form 3520 penalty and Form 8938 penalty) that she had paid. Approximately two months after filing the counterclaim, she filed a claim for refund. The government moved to dismiss the counterclaim on the ground of sovereign immunity because the defendant never filed an administrative refund claim with the IRS before filing the counterclaim.
The court ultimately ruled in favor of the government. It held that administrative remedies must be exhausted before a claim can be filed against the government. This means that a claimant seeking a refund must first file an administrative claim before filing a lawsuit or asserting a counterclaim in court. If an administrative claim is denied or the requisite six months has passed, then the claim is ripe for filing a lawsuit in court.
Citing United States v. Forma, 42 F.3d, 759, 764 (2d Cir. 1994), the court stated that under the doctrine of sovereign immunity the court is without jurisdiction to adjudicate a claim against the United States unless the claim falls within an applicable waiver of the United States’ presumptive sovereign immunity.
In general, the government has waived its sovereign immunity for claims for the refund of taxes, penalties, or other amounts the government has collected in excess of what the person owed (28 U.S.C. § 1346(a)(1), Forma, at 763). This general waiver, however, is limited. Among other things, the law requires that administrative claims for refund or credit must first be duly filed with the Secretary of the Treasury (26 U.S.C. § 7422(a)). This includes complying with the administrative claim exhaustion rules imposed by the Secretary for seeking a refund of taxes and penalties assessed under Title 26.
Since the defendant failed to file an administrative refund claim before filing her counterclaim, her claim was not ripe and, thus, the court lacked jurisdiction over her counterclaim.
Ms. Chen-Baker next argued that the “informal claim doctrine” which allows a court to consider imperfect or improperly filed claims and to perfect them later (see United States v. Kales, 314 U.S. 186, 194 (1941); Magnone v. United States, 733 F. Supp. 613, 618 (S.D.N.Y. 1989)) applied here. The court, however, also rejected the defendant’s attempt to utilize this doctrine, pointing out that this doctrine tolls the statue of limitation and does not “alter the jurisdictional prerequisites.” That she simply filed a refund claim at some point in time did not help her, as jurisdiction is determined at the time the complaint is filed in court, and in this case, the refund claim was filed after she filed her counterclaim.
The court’s ruling serves as a significant reminder for any individual or organization that plans to file a suit against the government for the refund of any tax or penalty assessed under Title 26. It is important to exhaust all administrative remedies, including filing a timely refund claim with the IRS, and waiting until the claim is denied or six months has passed, before filing a lawsuit or counterclaim in court. Failing to do so results in the court dismissing the case. There is no hope for lenience because the court has no jurisdiction to exercise such.
Philipp Behrendt is an Associate at Hochman Salkin Toscher Perez P.C., and a graduate of University of Southern California (USC) Gould School of Law (LL.M.) and a former associate of the leading German tax firm. Philipp’s prior experience includes representing wealthy individuals and companies in global tax settings, cross-border investigations and audit matters, as well as handling complex voluntary disclosure issues for U.S. and other international companies, stemming from tax avoidance structures as well as crypto assets.