Opinion ID: 814753
Heading Depth: 2
Heading Rank: 2

Heading: Refund and Abatement Claims

Text: The district court properly dismissed the Group’s refund claims. The Group apparently does not challenge this conclusion on appeal. Before a plaintiff can bring suit in district court, it must file “a claim for refund or credit . . . with the [IRS].” I.R.C. § 7422(a). There are time limits on filing an administrative claim, however. Any “[c]laim for credit or refund of an overpayment . . . shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires later.” I.R.C. § 6511(a). In addition to the administrative remedies requirement, a refund suit is limited to overpayment, I.R.C. § 6402(a), which is payment in excess of what is due. Jones v. Liberty Glass Co., 332 U.S. 524, 531 (1947). 16 No. 09-3380 The Group’s refund claims are time-barred. The Group made voluntary payments in February, May, and June 2002, which were applied to outstanding taxes for 2000, 2001, and 2002. The Group filed its administrative refund claim on July 1, 2005—over three years after the returns and two years after payment. Thus, the Group’s claims do not meet the requirements of the statute. Moreover, refund claims are limited to overpayment, and the Group does not allege it paid more than it owed. The Group’s situation is analogous to Schon v. United States, where we held that a company’s assertion that the IRS should have applied its payments to another liability does not constitute overpayment when it admits that it still owes taxes to the IRS. 759 F.2d 614, 617 (7th Cir. 1985). Further, the Group appears to seek a declaratory judgment that the IRS should have allocated the taxes to the trust fund portion. However, the Declaratory Judgment Act bars relief “with respect to federal taxes.” 28 U.S.C. 2201; Schon, 759 F.2d at 617-18. We affirm the district court’s dismissal of these claims.
Finally, Gessert argues his trust fund recovery penalty should be lowered under I.R.C. § 7422. To this end, he claims that the Group and Johnson orally agreed that voluntary payments would be allocated to the Group’s trust fund liabilities. The government counters that the IRS honors only written directions to apply funds to a specific liability. Accordingly, the IRS contends it was free to apply the funds in its own best interest. The IRS No. 09-3380 17 generally prefers applying payments to the non-trust fund liability because it can recover the trust fund portion from another person. And, “[o]nce the corporation is out of business, the United States can kiss goodbye any non-trust fund taxes owed [to] it but not paid.” See United States v. Schroder, 900 F.2d 1144, 1146 n.1 (7th Cir. 1990). As previously mentioned, 28 U.S.C. § 1346 authorizes “[a]ny civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal- revenue laws.” Gessert argues that his tax fund recovery penalty is erroneously high because the IRS should have credited the Group’s voluntary payments to its trust fund liability thereby lowering Gessert’s penalty liability. Unlike the Group’s claims, the parties agree that Gessert’s claim is timely, although the district court ruled otherwise. Generally, a party must pay his entire tax liability before bringing a viable suit. Flora v. United States, 357 U.S. 63 (1958). Thus, in the Group’s case, it must pay its entire tax liability before it seeks a refund for overpayment. However, divisible taxes are treated differently. Examples of divisible taxes include excise taxes, where the tax is assessed “per transaction” or “per head.” Trust fund penalty taxes are treated as “per employee”—i.e., each employee’s tax withheld but not paid 18 No. 09-3380 over constitutes a separate transaction, making it divisible. A taxpayer satisfies the administrative prerequisites for divisible taxes by paying the tax for a single transaction in each applicable period. M ICHAEL S ALTZMAN, IRS P RACTICE AND P ROCEDURE § 11.06 (2d ed. rev. 2002). Taxpayers can challenge trust fund penalty liabilities by paying the tax for one employee for each applicable period and filing an administrative claim within two years of payment or three of the return. Gessert satisfied these requirements by paying $100 for each period he was assessed trust fund penalty liability. “IRS policy permits taxpayers who ‘voluntarily’ submit payments to the IRS to designate the tax liability to which the payment will apply.” United States v. Energy Resources Co., Inc., 495 U.S. 545, 548 (1990) (citation omitted). Over time, the IRS has modified the scope of this right. At one time, the IRS required only “directions” from taxpayers in order to effectuate a directed payment. See Rev. Rul. 73-305, 1973-2 C.B. 43. However, the IRS subsequently curtailed the scope of the right that it had initially authorized, requiring that taxpayers provide “specific written direction as to the applications of the payment.” Rev. Proc. 2002-26 § 3.01 (emphasis added). Absent written directions, the “Service will apply the payment to periods in the order of priority that the Service determines will serve [the Service’s] best interest.” Id. at § 3.02. Thus, to the extent that at one time the IRS permitted oral directions to effectuate a directed payment, under revenue procedure 2002-26 (applicable here), a taxpayer No. 09-3380 19 must specify in writing the payment’s designation. See Martin v. Commissioner, 38 F. App’x 980, 984 (4th Cir. 2002) (“[U]nless a taxpayer provides specific written instructions for the application of a voluntary payment, the IRS may apply the payment as it wishes.”). Here, no specific written direction was provided to the IRS regarding the designation of the Group’s voluntary payments. Johnson was therefore entitled to apply the payments in the best interest of the IRS. Her application of the voluntary payments to the non-trust fund liability was not in error and does not merit reversal.