Refund Litigation Continued: Types of Cases

This blog builds on prior posts concerning refund litigation. This blog explores the types of tax refund cases that can be brought in the U.S. district courts and the U.S. Court of Federal Claims.

Types of Refund Litigation Cases

1. Income Tax

These are the most common refund suits and can arise from a variety of IRS-made changes, including: disallowance of deductions or credits, redeterminations of income, and disputes involving net operating losses or foreign tax credits.

While many income tax disputes can be resolved in Tax Court before payment, refund suits may follow post-payment examination disputes or arise when the period for requesting Tax Court litigation has lapsed.

2. Estate and Gift Tax

Refund suits involving estate or gift taxes often hinge on valuation disputes or allowance of certain expenses of the estate. There are frequently questions of facts in these areas, which could be decided by a jury.

3. Employment Tax

While the Tax Court can hear worker classification cases, the Tax Court generally lacks authority—notwithstanding its Collection Due Process authority—to hear employment tax disputes.   Employment taxes are divisible, meaning a taxpayer may pay a portion tied to one employee’s employment tax and sue for a refund without full payment of the total liability. 

4. Excise Tax

These cases can relate to taxes on fuel, air transportation, communications, wagering, retirement plans, health insurance mandates (e.g., under the Affordable Care Act), and private foundation activities, as well as associated penalties under the Internal Revenue Code

5. Penalty Refund Litigation (Heavily Litigated and Procedurally Unique)

Penalty refund litigation is increasingly common, especially in the wake of IRS enforcement campaigns and automatic assessments. Common targets include:

• Trust Fund Recovery Penalties: These penalties are also divisible, like employment taxes (above). There is no prepayment right to judicial review.
• Foreign Information Return Penalties (e.g., Forms 5471, 5472, 8938, 926): These penalties are not subject to prepayment judicial review in Tax Court. Refund litigation may be the only way to challenge them, despite persistent legal debate over their automatic assessment procedures and constitutional implications. There are separate cases that deal with whether the IRS has authority to assess some of these penalties, but that discussion is beyond the scope of this blog.
• Accuracy-Related and Civil Fraud Penalties: Typically arise after audits and are litigated alongside income tax refund claims.
• Failure-to-File and Late Payment Penalties: Taxpayers may argue that the penalties do not apply in refund court (e.g., if the taxpayer had reasonable cause for the delinquency issue).

No Prepayment Forum? Refund Litigation is the Only Option

Certain penalty assessments—particularly those outside the deficiency procedures like foreign information return penalties and trust fund recovery penalty assessments—are not subject to U.S. Tax Court jurisdiction. Taxpayers facing these assessments must either:

• Pay the penalty and file a refund suit; or
• Wait for collection action and pursue a limited Collection Due Process (CDP) hearing.

The lack of a prepayment court forum raises fairness and due process concerns. Courts have begun to see more refund suits as a result, especially as IRS penalties have grown in scope and severity.

Conclusion

Understanding the types of cases that can be brought in refund litigation—and the procedural hoops that must be jumped through—is essential for anyone facing contested IRS assessments. Sometimes, federal refund litigation may be the only path forward.

If you have a question about refund litigation, or any civil or criminal tax issue, please contact me at 214-749-2417 or jglassman@meadowscollier.com.