FOLLOW US

A couple arguing that the IRS failed to apply their tax overpayments to deficiencies claimed by the agency has asked the Fifth Circuit to reverse a lower court's dismissal of their suit. The couple claims the decision effectively asks them to pay twice.

5th Circuit Bar Refund Suit : Dispute Over Tax Overpayments

Jay and Lisa Balentine argued in a brief Tuesday that a Texas federal court erroneously adopted the government's stance. The court had claimed it lacked authority to hear the couple's complaint seeking to recover approximately $630,000 in overpayments and establish their right to claim about $348,000 in refunds.

The U.S. argued that under the "pay to litigate" rule from the Supreme Court ruling in Flora v. U.S., the couple was barred from bringing their case to federal district court due to an unpaid tax deficiency of about $480,000 for 2017. The Balentines contend this interpretation is incorrect.

5th Circuit Bar Refund Suit : Challenging the Flora Rule

Although Flora held that a taxpayer must pay any taxes due before suing in district court, the Balentines pointed out that the taxpayer in Flora made only a partial payment. They argued that Flora did not address how credits and overpayments affect a federal district court's jurisdiction, nor does it allow the IRS to ignore evidence showing no deficiency is owed.

The Balentines maintain they have paid their 2017 taxes in full. "The IRS has simply not yet 'allowed' such payment," they said. "Whether allowed or not, payment has undeniably been made. The IRS simply refuses to acknowledge that overpayment."

Filing and Overpayments

The Balentines filed their complaint in March 2023, arguing that Flora doesn’t apply when the IRS owes a refund for overpayments the agency must automatically credit toward assessed taxes. The government responded by asserting that it hadn’t determined whether the 2017 taxes were overpaid, creating a jurisdictional issue blocking the suit. The district court sided with the government.

According to their brief, the Balentines overpaid their 2014 taxes by $50,000 and their 2016 taxes by $420,000. For 2017, they filed a joint return showing a nearly $500,000 overpayment, requesting $200,000 be applied toward their 2018 estimated taxes and nearly $300,000 be refunded.

5th Circuit Bar Refund Suit : IRS Calculation Errors

The IRS had already calculated the Balentines' 2017 tax liabilities before they filed their return and sent a letter in November 2020 stating Jay Balentine owed $1.2 million for 2017. This figure has since been recalculated to about $480,000, the brief noted.

The couple claims the deficiency notices resulted from errors by the IRS or its computer systems when processing the substitute return. The IRS allegedly refused to correct these errors or acknowledge Jay Balentine's K-1 schedule's reported ordinary business income losses. Instead, the IRS recorded only the K-1 distributions, "which greatly alters the resulting tax liability," the couple said.

Legal Representation

The Balentines are represented by Andrew Jan Mytelka and Angela K. Olalde of Greer Herz & Adams LLP. The government is represented by Paul Andrew Allulis, Nishant Kumar, and Mary Elizabeth Smith of the U.S. Department of Justice, Tax Division.

The U.S. Department of Justice, Tax Division, and the Balentines' attorney did not respond to requests for comment.