A federal appeals court has revived a lawsuit charging the IRS with depriving taxpayers of billions of dollars in refunds on long-distance telephone excise taxes.

The court decided 2-1 last Friday in favor of Milwaukee tax consultant Neiland Cohen, who sued the IRS claiming that the agency’s procedures for giving taxpayers refunds on the now-defunct tax were inadequate. A lower court had thrown out the lawsuit, according to Bloomberg.com, before the appeals court reinstated it. Cohen is seeking class-action status on the lawsuit.

The IRS stopped collecting a 3 percent excise tax on long-distance phone service in 2006 after complaints from various companies and taxpayers that the tax, which dated back to 1898, was not applicable to modern telecommunications technology. The IRS established a way for a family of four to claim $30 to $60 in refunds, and approximately 90 million taxpayers did so by checking a box on their 1040. But claims above $60 required taxpayers to submit up to 41 months of phone bills to the IRS, along with a Form 8913. The Treasury Inspector General for Tax Administration found in 2007 that only about $3.8 billion of the $8 billion collected by the IRS in the 41 months prior to its announcement of the procedure was actually paid back in refunds.

“It took the Internal Revenue Service’s aggressive interpretation of the Tax Code to part millions of Americans with billions of dollars in excise tax collections,” wrote Judge Janice Rogers Brown in the court’s majority opinion. “Even this remarkable feat did not end the IRS’s creativity. When it finally conceded defeat on the legal front, the IRS got really inventive and developed a refund scheme under which almost half the funds remained unclaimed. Now the IRS seeks to avoid judicial review by insisting the notice it issued, acknowledging its error and announcing the refund process, is not a binding rule but only a general policy statement. We conclude the notice bound the service, tax collectors and taxpayers. Accordingly, we reverse the district court’s dismissal of appellants’ claims made under the Administrative Procedures Act.”

However, the appeals court also determined that Cohen filed his refund claim prematurely and, thus, affirmed the district court’s dismissal of his refund claim.

Another judge on the appeals court, Brett Kavanaugh, took issue in a dissenting opinion.

“The plaintiffs involved in this case did not properly seek refunds from the IRS pursuant to those authorized procedures,” he wrote. “Instead, they filed suit in federal court and attempted to style the case as a class action on behalf of tens of millions of Americans who paid the improper telephone excise taxes.” He said that the plaintiffs’ failure to exhaust their available remedies with the IRS precluded them from proceeding in a federal court at this time.


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