Mclaughlin & Stern’s John Barrie offers tips for pursuing litigation when the IRS fails to act on an amended tax return that uncovers an overpayment.

Sweeping staffing reductions at the IRS are raising concerns about unreasonable delays for processing amended tax returns with an overpayment and what options taxpayers may have in speeding up the approval of the overpayment refund on the amended tax return. Litigation may offer a solution.

Two recent reports show that there may be reason for concern. The Treasury Inspector General for Tax Administration said in a June 10 report that the IRS expects an additional loss of over 1,000 more employees who process amended returns and indicated the resignations will affect future return processing times. The IRS also indicated that more than 64% of the amended returns processed by accounts management don’t meet the 45-day processing goal. The TIGTA report found that it is becoming a slow process in many instances.

The National Taxpayer Advocate’s midyear report to Congress on June 25 indicated that the IRS lost over 22% of its workforce. Bringing the IRS workforce to its lowest staffing level since 2019 “is likely to impact taxpayers and potentially revenue collected,” the report stated.

Without a significant hardship, there may be little that the Taxpayer Advocate Service can do other than to confirm that an amended tax return was received by the IRS and is still showing as not yet processed.

However, taxpayers have the option of filing a tax refund suit in either a US District Court or the US Federal Court of Claims under Section 7422 of the tax code. The Treasury Regulations under Section 6402 treat an amended return showing an overpayment as a tax refund claim. Section 6532(a} provides that taxpayers can file a civil suit six months from the date they filed the refund claim with the IRS to obtain the payment of the refund claimed. Interest accrues statutorily.

Whether this is a viable option depends on the taxpayer’s specific situation, including the clarity of the right to the tax refund and whether the government will raise additional issues on the tax return that would reduce the tax overpayment claimed due. The government can offset a refund claim with other unrelated adjustments they find after reviewing the tax return.

Before filing a lawsuit for a refund on an amended tax return (that might be stuck in the IRS system with little ability to find out status and timing), it’s crucial to ensure that the information on the amended return contains sufficient facts for the IRS to act favorably on the refund claim.

The return should clearly set forth the basis (or bases) for the claim to withstand a motion to dismiss, detail each ground on which the refund is claimed, and present facts to apprise the IRS of the basis for the claim.

Once the government has filed its answer to the taxpayer’s complaint seeking the refund, it’s important to reach out to the DOJ attorney assigned to the case to introduce yourself and discuss the case’s procedural and timing aspects. This is the taxpayer’s opportunity to explain the case to the DOJ attorney and requires understanding the local procedural and timing rules of the US District Court or the US Court of Federal Claims where the suit is filed.

With typical US District Court local procedures, this likely will speed up the process, particularly where the allowance and amount of the refund is clear cut, and no other issues with the tax return exist.

But a new Department of Justice staffing development may slow that process down.

The DOJ on June 16 announced plans to eliminate its Tax Division as part of its workforce reductions. Despite earlier assurances of retaining the Tax Division given its unique role in handling tax controversies, the department plans to move those lawyers to its criminal and civil divisions as part of a larger reorganization.

The overall reduction in DOJ attorneys may be problematic in the ability to sometimes quickly resolve a clear-cut case. With fewer line attorneys handling DOJ tax cases, caseloads may grow with less time for a full focus on the merits of the taxpayer’s case-and burden of proof remains with the taxpayer, not the government.

There can be significant litigation costs if a case isn’t settled quickly, and these costs must be considered in determining whether a refund tax suit makes economic sense. There also are potential venue issues regarding where a suit may be filed, and the possible need for local counsel.

Unlike in the US Tax Court, which is a national court (like the US Court of Federal Claims), the venue in the US District Courts is generally where the taxpayer resides, which limits where the refund suit must be filed. Filing a refund suit may not make sense for all taxpayers with unprocessed tax refund claims.

However, it may be an appropriate option to consider when a refund claim is sitting with the IRS with no signs of movement soon. It also may be the right choice if there’s a strong chance that the refund claim, when and if processed, will be denied, and the taxpayer will need to file suit to claim the refund due in any event.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

John Barrie is a partner and chair of the tax practice group at McLaughlin & Stern.

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