Variance Doctrine in Tax Refund Litigation

Technical topics regarding tax preparation.
#1
DH001  
Posts:
61
Joined:
24-Jun-2021 9:50am
Location:
TN
According to Mertens Law of Federal Income Taxation:

"Under the variance doctrine (or substantial variance doctrine), a taxpayer may not sue the government for a refund until he first files a claim for refund.1 The claim must set forth in detail each ground on which a refund is claimed in facts sufficient to apprise the Service of the basis of the claim. Any subsequent litigation of the government's denial of the refund claim is limited to the grounds contained within the refund claim—that is, to grounds that do not materially vary from the refund claim. A federal court has no jurisdiction to entertain taxpayer allegations that impermissibly vary or augment the grounds originally specified by the taxpayer in the administrative refund claim. The purpose of the variance doctrine is to allow the Service to resolve disputes without litigation." § 58A:17. Variance between refund suit and refund claim, 15 Mertens Law of Fed. Income Tax'n § 58A:17

Taxpayer went through an employment tax IRS examination and the IRS proposed to reclassify several independent contractors to employees. Although I wasn't involved with client at the time, Taxpayer elected to pursue refund litigation in U.S. District Court instead of deficiency suit in U.S. Tax Court based on favorable precedent and opportunity for jury trial.

Taxpayer paid tax under Flora case divisible tax rule.

Taxpayer filed refund claims (I was not involved in initial decision to file refund suit or preparation of refund claims) in which:

1. The cover letter raised Section 530 of the Revenue Act of 1978 (safe harbor even if workers would be employees under IRS Factor Test in certain circumstances) as the basis for relief; and

2. The Form 941-X/843 submitted with refund claim stated "The Taxpayer respectfully asserts the employment taxes assessed for the ___ Quarter of the _____ Tax Year are erroneous as a matter of law" but did not specifically state that Taxpayer's claim is based upon relief under Section 530 of the Revenue Act of 1978 (safe harbor even if workers would be employees under IRS Factor Test in certain circumstances), IRC 3509 (employer pays reduced employment tax amounts) or IRC 3402(d) (employer's tax liability reduced by certain related tax amounts actually paid by the worker).

In preparing the Complaint in the refund suit, I would like to:

1. Argue that the Taxpayer is entitled to relief under Section 530 of the Revenue Act of 1978 (if win this argument, treatment as independent contractor would have been correct resulting in no employment tax liability);

2. In the alternative, if Taxpayer cannot win under Section 530 of the Revenue Act of 1978, argue that Taxpayer is entitled to reduced rates under IRC 3509; and

3. In the alternative, if Taxpayer cannot win under Section 530 of the Revenue Act of 1978 or IRC 3509, argue that Taxpayer is entitled to credit for certain taxes actually paid by the workers under IRC 3402(d) and 6651.

Does the variance doctrine preclude Taxpayer from raising alternative grounds for refund relief based on IRC 3509 or IRC 3402(d) since these appear to have not been raised in the refund claim?
 

#2
Posts:
2656
Joined:
28-Apr-2021 7:00am
Location:
FL
You may need to refile form 843.
Steve
 

#3
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
gatortaxguy, that won't work if the time to file a claim has expired.

See my response in the second post of this question:
https://www.taxprotalk.com/forums/viewtopic.php?f=8&t=22769
 

#4
Posts:
2656
Joined:
28-Apr-2021 7:00am
Location:
FL
I don't understand. Administrative remedies must be exhausted before filing suit. And if the time to file a claim has expired, I'd be concerned whether a refund suit filed thereafter would survive a motion to dismiss.
I'd also be concerned whether the cover letter preserved the taxpayer's right to argue an issue.
Steve
 

#5
dave829  
Account Deactivated
Posts:
1482
Joined:
9-Jan-2018 9:28pm
Location:
California
OP said that a claim was filed and that the complaint to initiate the refund suit was being prepared. You can't correct a defect in the claim (such as to raise a ground for the refund that was not stated in the claim) by filing another claim (this is what you suggested) if the time for filing a claim has expired. If you could do this, the variance doctrine would have no meaning, and taxpayers would file additional claims just before filing the complaint solely to expand the number of arguments that they could make in the refund suit.

Here is what I said in the other thread, which I am repeating here because this is apparently the thread that's been chosen to discuss this issue:

This is the 2nd time you’ve posted this, and you didn’t get any hits on the first post. I’ll take a shot at answering your questions, but I could be wrong since I have no experience with employment tax refund litigation.

Under the “variance doctrine” to which you refer, to sue for a refund in a federal court, the grounds for recovery that the taxpayer sets forth in federal court must be the same as the grounds that the taxpayer set forth in the claim filed with the IRS. A taxpayer is barred from raising in a refund suit grounds for recovery that had not previously been set forth in its claim for a refund.

You said that the cover letter for the claim raised Section 530 as a defense, and that no other grounds were stated in the claim for refund, so Section 530 was the ground upon which the claim was filed, and it is the only ground that may be asserted in court.

Courts have carved out an exception to the “variance doctrine” in cases where the government’s unilateral action itself creates the variance. So, if Section 530 relief doesn’t apply, then 3509 is mandatory unless there was intentional disregard per 3509(c).

3402(d) is an administrative provision to be relieved of the withholding tax if the employee paid the income tax on the compensation income. I don’t believe you can assert this argument in court because if 3509 applies, 3402(d) won’t apply. See 3509(d)(1).
 

#6
Posts:
2656
Joined:
28-Apr-2021 7:00am
Location:
FL
I apparently misunderstood the facts. My apologies for any inconvenience.
Steve
 


Return to Taxation



Who is online

Users browsing this forum: JoJoCPA and 84 guests