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January 9, 2016
Can The Department Of Revenue Retroactively Vacate An Otherwise Timely Refund Suit By Subsequently Issuing An Assessment That Covers The Same Time Period?
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Really?  Did this really happen?  I hope not but it I suspect that it did.  At a meeting last week, I heard the following fact pattern.  I would like to think that it is not true, but I also think that is something that could definitely happen.  Here’s the story and you can decide for yourself if this is a problem.

The taxpayer realized that it overpaid its taxes by $8x in the first year of the 4-year statute of limitations.  So, it sued for a refund for year one.  After the suit was filed, the Department of Revenue then did an audit and assessed tax of $16x.  The assessment included all four years, including the year that the taxpayer claimed a refund of $8x. 

So, let’s review.  There’s a refund claim for $8x and a subsequent assessment claim for $16x.  One would think that the $8x refund suit should go forward and the taxpayer could dispute the $16x claim internally with the Department.

Not so fast.  The Department successfully argued to the trial court that the $8x refund claim was not within RCW 82.32.150.  That statute says that “All taxes, penalties, and interest shall be paid in full before any action may be instituted in any court to contest all or any part of such taxes, penalties, or interest.”  The question is whether “all taxes” includes the subsequently assessed $16x. 

At the time the $8x refund claim was filed, there were no other taxes due.  After the refund claim was filed, the assessment was issued and now, the Department argued, the taxpayer needed to pay the $16x assessment before the taxpayer could proceed with the $8x claim.  The trial court agreed.  This was not a case when the Department audited and found both tax liability and credits, and then the taxpayer filed a refund claim for the credit without paying the assessment.  And it wasn’t the case when the Department issued an assessment, the taxpayer paid a portion of the assessment and then sued for a refund.  Rather, this was a case when a refund was the only issue at the time the suit was filed, and the Department took a subsequent action to introduce a taxpayer liability that effectively vacated the jurisdiction for the refund suit.

The taxpayer could not afford to pay $16x, so it lost its chance to recover the $8x refund.  If the story is true and there are no other factors at play to support this interpretation of RCW 82.32.150, then this decision invites substantial mischief, according to the relator of this story.  I have not reviewed the case file so I am only going on hearsay.  But if the story is accurate that the $16x assessment was suspiciously issued and its purpose was to prevent the taxpayer from proceeding on its refund claim, then WOW!  Then this is, indeed, very troubling.  Whether that was, in fact, the Department’s intention to deprive the taxpayer of its refund suit, or there was a legitimate claim to $16x, depriving the taxpayer of its refund claim, then I think this is an unintended result of RCW 82.32.150 under these facts. 

The taxpayer could not afford to pay $16x and went out of business.  I guess we’ll never know what the facts really were because the taxpayer no longer exists, but the fact that this could happen is distressful.  In my opinion, if the assessment chronologically follows the refund claim, then the later assessment should not prevent the taxpayer from pursuing the refund.  

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