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...Formal and Informal Claims for Refundderstatements from reportable transactions, and the section 6663fraud penalty.Significantly, the section 6676 penalty may be applied againsta claim for refund or credit, and the IRS takes the position thatthe penalty may be asserted against “any income tax return,whether original or amended, or other form, provided that the returnor form presents a claim for refund or credit for an excessiveamount.” 44 Where multiple penalties apply (e.g., a research creditreported on an original return is disallowed), the IRS apparentlywill assert the section 6676 penalty instead of the other penalties,stating that “[n]otwithstanding IRC section 6676(c), [it] has thesole discretion and authority to impose the penalty in the contextof other penalties.” 455. The penalty is an assessable penalty that is not subject todeficiency procedures. Section 6676 is codified under Subtitle F,Chapter 68, Subchapter B of the Code, which is entitled “AssessablePenalties.” Therefore, the penalty is not subject to deficiencyprocedures, and a statutory notice of deficiency is not requiredbefore the penalty is assessed. 46 The IRS has stated, however, thatthe penalty is subject to pre-assessment appeal procedures if ataxpayer timely requests reconsideration with the IRS AppealsOffice and submits a protest. 47Once the penalty is assessed, it must be paid on notice anddemand by the IRS in the same manner as a tax. If a taxpayerwishes to further challenge the assessment of the penalty, then thetaxpayer must file a refund action in the appropriate U.S. districtcourt or the U.S. Court of Federal Claims.D. IRS Assertion of the Penalty to DateThere have been multiple instances in which the section 6676penalty has been asserted with respect to the research credit. Aspreviously explained, Industry Director Directive #2 on ResearchCredit Claims provides that the section 6676 penalty “must beaddressed in all cases where the RC Claim for refund or credit isdisallowed in part or in full.” Moreover, the directive requiresthat examination teams “obtain and document the concurrencefrom a Technical Advisor where the RC Claim is fully or partiallydisallowed and the … penalty is not asserted.”In addition, there are other contexts in which the IRS has consideredasserting a section 6676 penalty and instances in which theIRS has, in connection with an audit of a claim for refund or credit,issued an Information Document Request for an explanation ofthe taxpayer’s reasonable basis. The American Institute of CertifiedPublic Accountants (AICPA) has reported that it is “aware ofsection 6676 penalties being imposed automatically and regularlywhen a claim for refund is denied, without any consideration ofwhether the position has a reasonable basis.” 48 The AICPA attributedthis, in part, to the IRS’s not having published regulations orother guidance, but also said that the penalty is “another exampleof a new provision where sufficient training has not been provided.”49 The AICPA may be overgenerous in making these allowances.The reasonable basis standard is well established, and it is hardto imagine that a radically different standard will be articulated inthe context of section 6676.Practical and Strategic Considerations with Respect tothe Perfection Requirement for Informal Claims andthe Section 6676 PenaltyA. To the Extent that the Section 6676 Penalty Applies to anInformal Claim, It May Only Apply to an Informal Claimthat Has Been PerfectedNeither the Code nor the legislative history specify whetherthe section 6676 penalty applies to informal claims for refund. TheIRS takes the position that the penalty applies to informal claims,and taxpayers should anticipate that the IRS may assert the penaltyagainst such claims. This issue will likely be addressed in theforthcoming regulations, and there is no reason to expect the IRS todeviate from its current position.If the penalty applies to informal claims, it should only be appliedagainst an informal claim that satisfies all of the requirementsfor such a claim. That is to say, the penalty should only be assertedagainst an informal claim that (i) provides sufficient notice that ataxpayer is asserting a right to a refund, (ii) contains a descriptionof the legal and factual basis for the refund, (iii) has a written component,and (iv) is subsequently perfected by a formal claim forrefund that remedies the technical defects. In other words, if a taxpayerdid not subsequently perfect an informal claim, such that theclaim is not valid for jurisdictional purposes, then it should not besubject to a penalty.B. Taxpayers May Be Able to Mitigate the Risk of a Section6676 Penalty by Filing an Informal Claim and Delaying ItsPerfectionIn light of reports that the IRS is “automatically” asserting thepenalty when a refund claim is disallowed in part or in full, taxpayersmust evaluate the prospects of a claim disallowance andof a section 6676 penalty before filing a refund claim. Because thepenalty should not apply to an informal claim that has not beenperfected, however, taxpayers may be able to use the perfectionrequirement to their advantage. Specifically, if there is a risk thatthe IRS will disallow all or part of a refund claim and find that the“excessive amount” did not have a reasonable basis, the taxpayershould be able to mitigate the penalty exposure by filing an informalclaim and delaying action to perfect it. This would allow thetaxpayer to evaluate the various factors that affect the likelihoodof a disallowance and its ability to demonstrate a reasonable basis.Such factors include administrative guidance and case law that affectthe merits of the claim, the IRS’s response to similar claimssubmitted by other taxpayers, and the taxpayer’s relationship withits on-site IRS examination team. Waiting to perfect the informalclaim would also allow more time for the taxpayer’s in-house andoutside tax advisers to continue to review the merits of the claim. Ifthe taxpayer chooses to proceed with the refund claim, the taxpayermust timely perfect the informal claim before the IRS rejects it.There is, of course, the possibility that the IRS will consider themerits of the informal claim, waive the formal claim requirement,and thereby establish a separate basis for the informal claim’s validity.In this regard, the courts have required “unmistakable”proof that the IRS “has in fact seen fit to dispense with [the] for-May-June 2011 141
...Formal and Informal Claims for Refundmal requirements and to examine the merits of the claim.” 51 If suchproof exists, then the likelihood of a section 6676 penalty may beincreased if the claim is disallowed.ConclusionThe IRS’s enforcement of its new rule that an informal claim mustbe perfected before it is jurisdictionally adequate and the uncertaintiesassociated with the still regulation-less section 6676 penaltyboth compel a taxpayer to carefully evaluate the merits of arefund claim or credit before asserting it, to monitor and documentthe IRS’s handling of an informal claim, and to consider strategiesto minimize the potential assertion of the penalty.Gerald A. Kafka is the Global Chair of the Tax Controversy PracticeGroup at Latham & Watkins and the local Tax Department Chair forthe firm’s Washington, D.C. office. He began his professional careeras a trial attorney in the Tax Division of the U.S. Department of Justice.He received his J.D. degree from the University of CincinnatiSchool of Law and his LL.M. in Taxation degree from GeorgetownUniversity Law Center. Mr. Kafka is the principal author of Litigationof Federal Civil Tax Controversies, a leading treatise on civil taxlitigation, and has been an adjunct professor in the LL.M. (Taxation)program at Georgetown since 1979. He is a frequent speaker at TEIprograms. He may be reached at gerald.kafka@lw.com.Paul B. Hynes, Jr. is an associate in the Washington, D.C. office ofLatham & Watkins, where he has practiced law since 2006. Mr.Hynes’s practice focuses primarily on tax controversy and litigationmatters. He received his B.A. degree from the University of Michiganand his J.D. degree from American University’s Washington Collegeof Law, where he served on the American University Law Review andparticipated in the school’s Federal Tax Clinic. He may be reached atpaul.hynes@lw.com.1. See I.R.C. § 6511(b)(1) (“No credit or refund shall be allowed or madeafter the expiration of the period of limitations … for the filing of a claimfor credit or refund, unless a claim for credit or refund is filed by thetaxpayer within such period.”); § 7422(a) (“No suit or proceeding shallbe maintained in any court for the recovery of any internal revenue taxalleged to have been erroneously or illegally assessed or collected, orof any penalty claimed to have been collected without authority, or ofany sum alleged to have been excessive or in any manner wrongfullycollected, until a claim for refund or credit has been duly filed with theSecretary, according to the provisions of law in that regard, and the regulationsof the Secretary established in pursuance thereof.”).2. See Treas. Reg. §§ 301.6402-2, 301.6402-3. See generally Missouri Pac.R.R. v. United States, 214 Ct. Cl. 623, 628 (1977) (“The requirementsimposed by Treasury regulations must be distinguished from thoseimposed by statute; the former requirements may be waived while thelatter may not. In the instant case we are concerned with the statutoryrequirement of filing a timely claim for refund. … Under the applicablelaw that requirement cannot be waived.”).3. See, e.g., United States v. Kales, 314 U.S. 186, 194-97 (1941); American Radiator& Standard Sanitary Corp. v. United States, 162 Ct. Cl. 106, 113-18 (1963).4. See, e.g., United States v. Memphis Cotton Oil Co., 288 U.S. 62, 72 (1933);BCS Fin. Corp. v. United States, 118 F.3d 522, 524 (7th Cir. 1997).5. New England Elec. Sys. v. United States, 32 Fed. Cl. 636, 641 (1995); seeWall Indus., Inc. v. United States, 10 Cl. Ct. 82, 98 (1986) (“Save for somesort of a written component, the cases in this court emphasize that thereis no preconceived set of universal facts and circumstances which otherwisedefine an efficacious informal claim. … Rather, … each caseis to be decided on its own merits, paying particular attention to thecombined effect of the unique facts and circumstances known to thegovernment at the time the alleged informal claim is made.”) (emphasisin original).6. New England Elec. Sys. v. United States, 32 Fed. Cl. at 641. In determiningwhether a taxpayer has provided sufficient notice, “[t]he relevantinquiry is the IRS’s knowledge.” Mobil Corp. v. United States, 67 Fed.Cl. 708, 716 n.18 (2005). Constructive notice, however, is sufficient. Id.at 716; see Kaffenberger v. United States, 314 F.3d 944, 955 (8th Cir. 2003)(looking to whether “the Commissioner knew, or should have known,that a claim was being made”).7. Mobil Corp. v. United States, 67 Fed. Cl. at 716 (quoting New EnglandElec. Sys. v. United States, 32 Fed. Cl. at 641). The legal and factualbases must “be described with some degree of specificity, but the taxpayer‘can properly rely on the very specific knowledge gained by therevenue agent in auditing its returns,’ as long as that knowledge is obtainedwithin the statute of limitations.” Id. at 718 (quoting AmericanRadiator & Standard Sanitary Corp. v. United States, 162 Ct. Cl. at 115).8. Id. at 716 (quoting Arch Eng’g Co. v. United States, 783 F.2d 190, 192(Fed. Cir. 1986)). The written component “need not contain all of theinformation necessary to the put the IRS on notice that a refund wasbeing sought” and is “not [to] be given a crabbed or literal reading,ignoring all the surrounding circumstances which give it body andcontent,” as the “focus is on the claim as a whole, not merely the writtencomponent.” Kaffenberger v. United States, 314 F.3d at 955 (quotingEstate of Hale v. United States, 876 F.2d 1258, 1262 (6th Cir. 1989)).9. Mobil Corp. v. United States, 67 Fed. Cl. at 717 (quoting Donahue v. UnitedStates, 33 Fed. Cl. 600, 608 (1995)).10. Kaffenberger v. United States, 314 F.3d at 955.11. 234 F.3d 873, 878-79 (5th Cir. 2000).12. 314 F.3d at 954-56 (“At a bare minimum, the Kaffenbergers’ informalclaim had to contain a written component within the statute of limitations,and must have been followed by a formal claim that remediedany defects in the informal claim.”). The taxpayers in Kaffenberger hadnot previously filed an original return, and the IRS treated the latefiledoriginal return as a claim for refund and, in response, issued aformal notice of disallowance.13. 439 F.3d 1009, 1015 (9th Cir. 2006) (quoting Kaffenberg v. United States,314 F.3d at 955).14. 2007-1 U.S. Tax Cas. (CCH) 50,187, 50,188 (N.D. Ill. 2006), rev’d,549 F.3d 530, 533 (7th Cir. 2008). The Seventh Circuit reasoned that“[a]fter the IRS applied [the taxpayer’s] overpayment to the 1992 taxableyear, the case became a suit for a 1992 refund because it centeredon an adjudication of her remaining 1992 tax liability.” Id. at 532. Inthis regard, the court noted that although the taxpayer’s “originalcomplaint requested a refund for her 1999 overpayment, her amendedcomplaint requested a refund for the 1992 tax year.” Id.15. 86 Fed. Cl. 351, 362, 364-65 (2009).16. See Gallo v. United States, 950 F. Supp. 1246, 1249-50 (S.D.N.Y. 1997)142The Tax Executive
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