Ask The California Employment Tax And Payroll Tax Attorney – The Confusing Full Payment Rule In EDD And IRS Refund Claims – The Chaisson Case
By Robert S. Schriebman
Just how much do you have to pay the EDD or the IRS before you can file a valid Claim for Refund? The rules usually say that full payment is required. Exactly what does “full payment” mean? This question has generated quite a bit of confusion. Most tax deficiencies are composed of three elements:
- The tax portion.
- The penalty portion.
- Accruing interest.
The recent case of Chaisson v US, (U.S. Court of Appeals, Fifth Circuit; 23-10551, (January 8, 2024)) attempts to put to bed this area of confusion but instead has generated more uncertainty. This article will discuss the Chaisson case as well as the case of Shore v. US, 9F 3d 1524 (1993), and the EDD version in Masi v Nagel, 5 Cal. App 4th 608 (1992).
The Chaisson Case
Chaisson filed a late 2018 federal income tax return. After processing the return, the IRS assessed $777,000 in taxes, $157,000 in penalties plus interest. Chaisson paid the taxes and the penalties and filed a claim for refund. However, Chaisson failed to pay $75,000 in interest. The IRS argued that the claim was legally insufficient and Chaisson, therefore, was not allowed to file a valid suit for refund in federal court.
In the days of feudalism, the king could do no wrong. It was impossible to sue the king. The US, as a sovereign, is also immune from suit except when statutes provide otherwise. In tax law, the US is allowed to be sued for refund of taxes. However, there are certain conditions. One condition requires that the ‘taxes’ be paid in full before a refund claim can be filed and honored. This has lead to the so called “full payment rule.” The rule requires full payment of the assessment before an income tax refund can be maintained in a Federal District Court. In other words, the taxpayer must “pay first and litigate later.”
The US District Court judge ruled that Chaisson failed to pay $75,000 of the tax bill. The $75,000 represented unpaid interest. Chaisson appealed to the 5th Circuit Court of Appeals. Chaisson argued that the case of Shore v US only requires payment of the tax portion only and Chaisson paid that portion as well as the penalty portion. The problem: Chaisson failed to argue the Shore case in the District Court and raised it for the first time in his appeal to the 5th Circuit Court. New issues and arguments cannot be raised for the first time on an appeal. Apparently, some lawyer may not have done his/her homework.
EDD Refund Claims
A taxpayer wishing to have his/her day in court must pay the EDD assessment in full, all three portions, before a valid refund claim can be filed. Masi v Nagel, 5 Cal. App 4th 608 (1992)
Refund claims can be tricky and each taxing agency, be it the EDD, the FTB, or the IRS have their own special rules as to what must be paid in order to successfully file a claim for refund.
Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Web Site Article 785