The recent decision in Carole Nicholson v. United States of America, USDC ND FL, Case No. 3:24-cv-00603, serves as a reminder for tax professionals regarding the strict procedural requirements for tax refund claims. This case underscores the jurisdictional prerequisites that must be satisfied before a federal court can hear a taxpayer’s suit against the Internal Revenue Service (IRS), particularly concerning the proper forms and timeliness of administrative claims.

Factual Background of the Dispute

Plaintiff Carole Nicholson initiated a lawsuit against the United States, seeking a refund of taxes for the years 2014, 2015, and 2016. Nicholson asserted that the IRS erroneously overstated her taxable income for these years. Her claim stemmed from an alleged misattribution of "gun trust" revenue, which she contended was exclusively earned by an associate and not the Nicholson Law Firm, LLC, where her late husband was a principal.

According to Nicholson, the confusion began in 2014 when an associate at the law firm started creating gun trusts for clients, with the associate purportedly being the sole beneficiary of the accumulated funds. When this associate left the firm in 2015, they allegedly failed to change the Employer Identification Number (EIN) associated with the gun trust account, which led the IRS to incorrectly attribute this revenue to the law firm and, consequently, to her late husband’s taxable income. Nicholson, who had filed joint tax returns with her late husband for the years in question, argued that the firm did not enjoy any portion of this "gun trust" revenue.

Nicholson stated that she had filed "a claim for refund" with the IRS for the tax years at issue but had not received a response. On November 26, 2024, she filed the lawsuit, attaching what she believed were the refund claims she had previously submitted to the IRS. The documentation attached to her complaint specifically showed that she filed two Form 843s, Claim for Refund and Request for Abatement, with the IRS on January 30, 2024, for the 2015 and 2016 tax years, respectively. No documentation for a 2014 refund claim was attached.

The Taxpayer’s Request for Relief

In her complaint, Carole Nicholson sought to be refunded the taxes paid for the tax years 2014, 2015, and 2016, contending that the IRS’s assessment of income for those years was incorrect.

The Court’s Jurisdictional Analysis and Legal Standards

The United States, on behalf of the IRS, moved to dismiss Nicholson’s complaint for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). The court’s analysis focused on whether it had the authority to hear the case, emphasizing that federal courts are courts of limited jurisdiction, empowered only to hear certain categories of conflicts.

A Rule 12(b)(1) motion can challenge a complaint facially or factually. In this case, the United States mounted a facial attack against Nicholson’s claims, meaning the court primarily assessed the sufficiency of the allegations within the complaint itself, including its attached exhibits. When exhibits contradict the general allegations of the pleading, the exhibits govern.

The court clarified that while 28 U.S.C. § 1346(a)(1) authorizes taxpayers to sue the IRS for a refund, it is a well-established jurisdictional prerequisite that a taxpayer must first duly file an administrative refund claim with the IRS in accordance with the relevant provisions of the Internal Revenue Code. This requirement is crucial to prevent surprise, provide the IRS adequate notice of the claim and its underlying facts, and allow the agency to conduct an administrative investigation and make an initial determination. It also serves to protect the IRS’s time and resources and ensures that the IRS, not the federal courts, retains initial authority over tax refund claims.

To duly file a refund claim, several conditions must be met:

Timeliness: The claim must be submitted "either within three years from the time the tax return was filed or two years from the time the tax was paid".
Specificity and Notice: The filing must sufficiently inform the IRS of the basis for the claim and be individualized to a particular tax year. Specifically, "the administrative refund claim must set forth ’in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof’" (26 C.F.R. § 301.6402–2(b)(1)).
Separate Claim for Each Year: "A separate claim must be made ’for each taxable year or period’" (26 C.F.R § 301.6402–2(d)).
Proper Form: Governing IRS regulations require that claims be filed "on the form so prescribed" (26 C.F.R. § 301.6402-2(c)). For an overpayment of income tax for an individual, the refund claim must be filed with the IRS using Form 1040X, Amended U.S. Individual Income Tax Return (26 C.F.R. § 301.6402-3(a)(2)). Failure to use the appropriate tax refund form precludes a district court from exercising subject matter jurisdiction.

The court also discussed the informal claim doctrine, a judicially created exception that offers some leniency by forgiving "harmless noncompliance with formalities". This doctrine allows a taxpayer to satisfy the jurisdictional prerequisite if they amend a timely filed, albeit initially incorrect, refund claim. However, an informal claim must still "fairly advis[e] the Commissioner of the nature of the taxpayer’s claims" and its "formal defects and lack of specificity" must be "remedied by amendment filed after the lapse of the statutory period" (United States v. Kales, 314 U.S. 186, 194 (1941)). A crucial condition precedent for the informal claim doctrine is the timely filing of the initial, defective claim.

Application of Law to the Facts and Court’s Conclusions

The court applied these legal standards to Nicholson’s claims for each tax year:

2014 Refund Claim

For the 2014 tax year, Nicholson claimed she filed a refund request, but her own attached documentation contradicted this assertion. The exhibits only showed refund claims for 2015 and 2016. Since no refund claim with the IRS existed for the 2014 tax year, the court determined it lacked subject matter jurisdiction over this claim. The principle is clear: "until a claim for refund or credit has been duly filed with the [IRS]," no tax refund suit "shall be maintained in any court" (26 U.S.C. § 7422(a)).

2015 and 2016 Refund Claims

Regarding the 2015 and 2016 tax years, Nicholson had filed Form 843s. However, the court emphasized that for an individual’s income tax overpayment, a refund claim must be made on Form 1040X (26 C.F.R. § 301.6402-3(a)(2)). The court concluded that Nicholson’s submission of Form 843 did not fulfill the statutory (26 U.S.C. § 7422(a)) or regulatory (26 C.F.R. § 301.6402-3(a)(2)) requirements. Nicholson herself conceded that no Form 1040X had been filed with the IRS.

Furthermore, the court found that Nicholson had not remedied any purportedly informal refund claim. Even if the Form 843s could be considered informal claims, the jurisdictional prerequisite requires that "formal defects" be remedied by amendment. Since Nicholson conceded she had not filed the proper Form 1040X to perfect her claim, the court could not accept the Form 843 submissions as valid informal claims sufficient to establish subject matter jurisdiction.

The court also observed that Nicholson’s 2015 and 2016 refund claims appeared to be untimely. Filed in January 2024 (or possibly November 2023), these claims exceeded the statutory limitations requiring claims to be filed within three years from the time the return was filed or two years from the time the tax was paid (26 U.S.C. § 6511(a)). The court noted that a condition precedent of the informal claim doctrine is the timely filing of a claim, even if it contains defects.

Key Taxpayer Mistakes and What Should Have Been Done

This case clearly illustrates several critical errors made by the taxpayer that resulted in the dismissal of her lawsuit for lack of subject matter jurisdiction.

Failure to File Any Claim for 2014: For the 2014 tax year, no administrative refund claim was filed with the IRS whatsoever, as evidenced by the exhibits attached to her own complaint.
- What should have been done: A proper refund claim, utilizing the correct form (Form 1040X), should have been filed for the 2014 tax year within the statutory period, which is generally three years from the time the return was filed or two years from the time the tax was paid.
Use of Incorrect Form for 2015 and 2016: Instead of filing Form 1040X for the refund of individual income tax overpayments for 2015 and 2016, Nicholson filed Form 843. Form 843 is generally used for claims other than income tax, such as excise taxes or penalties, while Form 1040X is specifically prescribed for amending individual income tax returns and claiming refunds related to them.
- What should have been done: Nicholson should have filed Form 1040X for both the 2015 and 2016 tax years, as this is the required form for claiming a refund for an overpayment of individual income tax.
Failure to Remedy Formal Defects for Informal Claim: Even if the Form 843s could have been considered timely informal claims, Nicholson failed to follow through by filing the proper Form 1040X to "perfect" or "remedy" the formal defects of the initial incorrect submission. The informal claim doctrine requires subsequent amendment to solidify the claim’s specifics.
- What should have been done: Upon realizing the incorrect form was used, Nicholson should have filed the proper Form 1040X to amend and perfect her refund claims for 2015 and 2016, specifically detailing the grounds and facts of her claim.
Potential Untimeliness of Claims: The court observed that even the incorrectly filed Form 843s for 2015 and 2016 appeared to be untimely, having been filed at least seven years after 2016, which is outside the typical three-year or two-year statutory limitations for refund claims. Timeliness is a fundamental aspect of both formal and informal claims.
- What should have been done: All refund claims, whether initial or corrective, must adhere to the statutory limitations period for filing.

Conclusion

The Nicholson case serves as a stark reminder of the paramount importance of strict adherence to procedural requirements in tax matters. For CPAs and Enrolled Agents, it reinforces that subject matter jurisdiction is not a given in tax refund litigation. The failure to file the correct administrative form, or any form at all for a given tax year, and to ensure timeliness and specificity, can lead to the dismissal of a client’s case before the merits of the tax dispute are even considered. Professionals must ensure that all administrative prerequisites are fully satisfied, utilizing the correct forms and adhering to strict deadlines, to properly exhaust administrative remedies and preserve their clients’ rights to seek judicial relief.

Prepared with assistance from NotebookLM.