A federal judge has allowed a class-action lawsuit to proceed over the IRS’s handling of an $8 billion refund program for the now-defunct telephone excise tax.

The lawsuit, Swisher v. United States, was filed on Jan. 9, by a Haverford, Pa.-based law firm, Chimicles & Tikellis, on behalf of lead plaintiff Adam Swisher and similarly situated plaintiffs. The complaint filed by C&T in the U.S. District Court for the Middle District of Pennsylvania alleges that the government improperly collected the Federal Communications Excise Tax, a 3 percent excise tax levied on certain long-distance telephone services.

After losing several cases on that issue, the IRS issued Notice 2006-50 on May 25, 2006, conceding that it had indeed improperly collected the tax for many years. The IRS agreed to stop its collection of the tax going forward, and announced that it would return taxes that had been improperly collected between March 1, 2003 and July 31, 2006.

The complaint filed by C&T challenges the refund process in the IRS notice as it applies to taxpayers who do not file income tax returns, many of whom are senior citizens and other low-income persons with disabilities. The notice required taxpayers to seek a refund of the improperly collected excise tax by checking a box on their 2006 income tax returns.

The non-filers that did not file a return were required to seek their refund by filing a new form (a 1040EZ-T) that had been created for this purpose. Of the 10 to 30 million non-filers that were entitled to a refund, only 800,000 of them filed a Form 1040EZ-T to obtain one, and only between 2.6 and 8 percent of these non-filers actually received a refund. According to the complaint, the government had the capability to provide individualized notification of the notice to these taxpayers, but failed to do so.

The complaint filed by C&T alleges that the refund procedure in the notice violates due process because, among other things, the government failed to provide non-filers with individualized notification that they were required to file a special form 1040EZ-T in order to receive a refund. Among other things, it seeks a court order that would require the government to provide notice to the millions of non-filers that still have not received any notification of their entitlement to a refund, or of the procedures required to get it.

The government filed a motion to have the case dismissed based upon various sovereign immunity and subject matter jurisdiction arguments. On Nov. 18, 2009, U.S. District Judge John E. Jones III issued a memorandum opinion denying the government’s motion to dismiss. Among other things, the court explained that several of the government’s immunity arguments were inapplicable because this unique action challenges the process in the notice, and is not a typical tax case seeking a tax refund. The court’s opinion also found that the plaintiff had stated a plausible claim that he did not receive notice sufficient to satisfy due process.

Discovery in the case has resumed and is currently ongoing. 

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