Advice From IRS No Excuse for Keeping Erroneous Refund

Post Date: 10/26/12
Last Updated: 10/26/12


Cross References
• Bame, U.S. Dist. Court, MN, August 16, 2012

An involuntary bankruptcy petition was filed against the taxpayer’s spouse as a result of his unprofitable business ventures. During the bankruptcy, the couple’s relationship became severely strained, and they filed a petition for divorce. The bankruptcy estate paid approximately $580,000 to the IRS to satisfy tax obligations. The IRS received the payment but did not properly credit the amount against all taxes owed. As a result, the IRS sent notice that it would be refunding $519,360, plus interest. The taxpayer’s spouse twice contacted the IRS to confirm that he would be receiving the refund. Both times the IRS confirmed that its records showed that a refund was due. The taxpayer also received a letter from Kathy Wells of the Taxpayer Advocate Service indicating that the refund would be sent to him.

When the check was received, both the taxpayer and her spouse drove to the bank and deposited it into a joint account. Over the next few days, they wrote several checks from that account.

The IRS eventually determined that the refund check had been issued by mistake. Its efforts to contact the taxpayer and her spouse were unsuccessful. The IRS sent the taxpayer and her spouse a notice that it would levy the Social Security benefits paid to the taxpayer’s spouse. The letter was sent back to the IRS marked “return to sender.” The taxpayer later testified that she and her husband saw no reason to respond to the government’s collection efforts because “the money was gone.” After collection efforts failed, the government filed suit against the taxpayer’s spouse in District Court to recover the erroneous refund. The taxpayer’s spouse died a short time later, and his estate was substituted as a defendant. The estate then agreed to the full amount sought by the government.

The government then proceeded to recover money from the taxpayer under the Minnesota Uniform Fraudulent Transfer Act. Under this Act, even if the defendants’ arguments were to prevail, equity dictates that they return the erroneously distributed funds under the doctrine of unjust enrichment. An unjust enrichment claim requires a plaintiff to show that the defendant (1) has knowingly received a benefit (2) to which he is not entitled (3) in circumstances under which retaining the benefit would be unjust.

The taxpayer argued that she was not unjustly enriched because she did not know that the refund was erroneous. She did not argue that her deceased husband was in fact entitled to the refund. Instead, she argued that she reasonably relied on the IRS’ assurances that the refund was appropriate. As a matter of law, however, the Court said the taxpayer cannot rely on the mistaken advice of an IRS agent. The Court said: “We have been very clear in the past that a mistake of law by a government agent, acting without audit or examination, does not amount to an act or interpretation upon which the taxpayer could justifiably rely. Those who deal with the government are expected to know the law and may not rely on the conduct of government agents contrary to the law.” The Court ruled the taxpayer was required to pay back the portion of the erroneous refund that she received. She was not liable for the portion that her deceased husband received.
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