By Anthony Diosdi
In the future, a jury of selectors will vote on whether former Miami Dolphins linebacker Zach Thomas should be in the Hall of Fame. Down the road, in a Fort Lauderdale federal court room, a jury might vote whether Thomas should get over $18,000 plus interest back from the Internal Revenue Service (“IRS”).
Zach and wife Maritzabel Thomas, as a married couple who filed taxes jointly, filed a lawsuit in Fort Lauderdale federal district court on January 3, 2020 for a refund of an accuracy related penalty in the amount of $18,602 plus interest for the 2007 tax year.
The story starts with Gary Stern, a Chicago tax lawyer who got an 18 month prison sentence after pleading guilty to committing tax fraud in a case involving energy credit investments. Stern’s indictment said he “aided and assisted and procured and counseled and advised the preparation and presentation to the IRS of at least 55 joint and individual” tax filings from 2006 through 2008 which fraudulently claimed tax credits of $4,898,076.
Zach Thomas’s Refund Claim
The IRS assessed a penalty against Zach Thomas under Internal Revenue Code Section 6662. This Internal Revenue code imposes an additional penalty on portion of an underpayment of tax attributed to: 1) negligent or disregard of federal tax or 2) a substantial underpayment of income tax. The main defense to a Section 6662 penalty is if the taxpayer acted with reasonable cause and good faith in determining his tax liability. Reliance upon professional tax advice in planning and reporting a transaction may constitute reasonable cause and good faith. See Betson v. Commissioner, 802 F.2d 365, 372 (9th Cir. 1986); Chamberlain v. Commissioner, 66 F.3d 729 (5th Cir. 1995) (citing United States v. Boyle, 469 U.S. 241 (1985)). In this case, Thomas relied upon disgraced attorney Gary Stern. Consequently, Zach Thomas’s reliance upon his tax advisor may be reasonable for purposes of demanding a refund of the Section 6662 penalty.
Procedure for Refund Litigation
Internal Revenue Code Section 6511 establishes the basic rule for refund of an overpaid of a tax or penalty. First, in order to proceed with refund litigation, in most cases, the entire tax liability, penalty, and interest must be paid in full. Second, a request for refund must be made before the expiration of the period of limitations. To timely file a claim for refund, the claim must be filed within 1) three years from the date the return in question was filed or 2) two years from the date the claimed tax or penalty was paid, whichever is later.
A claim for refund of an overpayment is typically filed on an amended tax return. The amended tax return must state the amount of tax and/or penalties requested refunded. The amended tax return must attach a written statement stating the grounds on which the refund should be granted. This is probably the most important part of the refund because a later lawsuit cannot vary from the reason stated on the amended tax return. Thus, the amended tax return must state the amount requested to be refunded and the “ground” for which the refund should be granted.
Once the claim for refund is filed with the IRS, the IRS must be provided with six months to either accept or reject the claim. If the IRS rejects the claim for refund or ignores the claim and more than six months have elapsed since it was filed with the IRS, the individual is free to file suit and demand a refund in either a United States district court or Court of Federal Claims.
During his career with Miami Dolphins, Zach Thomas had a knack for flustering Quarterback Tom Brady. Zach now faces a more formidable opponent, the United States Government in the courtroom. Hopefully Zach Thomas will be up to the challenge.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.