No one likes a surprise tax bill. But imagine being told that you owed the IRS $200,000 because you had failed to file your return, when you knew full well that you had.
That’s precisely what happened to a client of the Ronald M. Mankoff Tax Clinic. But thanks to clinic director Caleb Smith, clinical professor of law and assistant dean of clinical education, and former student attorney Caroline Rice ’24, this past summer, the IRS not only wiped his tax debt clean but handed him a refund of more than $6,000.
“There is a lot more to the story than just the numbers, though,” Smith said. The case raised fundamental questions about what it means to file a tax return electronically at a time when more than 90 percent of all returns are submitted online.
The client’s troubles began in 2004, when he began racking up taxes and penalties for making early withdrawals from a retirement account while struggling with addiction issues. Before long, he owed the IRS nearly $150,000, a sum he couldn’t possibly pay off with his working-class wages. (The clinic, which is supported by a federal grant, works exclusively with low-income taxpayers.) He did, however, come into a modest inheritance and was able to settle with the IRS in 2014 by agreeing to give them every single penny of it and then some.
“Our client is a very sympathetic guy,” said Rice, a former student attorney and student director at the clinic who is now an associate with Stinson in Minneapolis. “He was trying to get right with the IRS.”
But as Smith explained, IRS settlements are contracts that require taxpayers to file on time for a certain number of years. “If you screw up in year two, three, four, or five, the debt comes back,” he said.
By the time the client settled, he was working a blue-collar job, withholding more than enough to cover his taxes and keeping his hands off his retirement account. “He was basically due refunds every year,” Smith said. He was also using tax software to prepare and file his returns. And that’s how things went sideways: In April of 2016, the client hit “send” to e-file his 2015 return, and the IRS rejected it due to a problem with the PIN he had used. (All electronic returns must include a five-digit PIN, and the one the client used didn’t meet IRS guidelines.)
Unfortunately, the rejection email wound up in the client’s spam folder, and he never saw it, leading the IRS to claim that he had breached his settlement agreement by failing to file. Meanwhile, his original $150,000 debt had ballooned to $200,000 due to accrued interest and penalties. The IRS refused the client’s effort to make a second settlement, and by 2022, they were threatening to garnish his wages.
The client got his first lucky break when he was referred to the Mankoff Tax Clinic through the American Bar Association’s Virtual Settlement Week program, which matches volunteer lawyers with unrepresented taxpayers involved in tax disputes. He got his second during his initial videoconference with Smith and Rice, when Smith immediately saw a connection between his PIN issue and another case, Fowler v. Commissioner—the only case that Smith has students in his tax procedure class read not once but twice. “Not that many attorneys know this case, which I am borderline obsessed with,” Smith said.
Drawing on Fowler, Smith and Rice argued that the client had, in fact, filed his return, regardless of whether the IRS ultimately rejected it based on its own internal filters. “He did file his return on time; the IRS just didn’t process it. That’s their fault,” Smith said.
According to Rice, the IRS attorneys in the agency’s St. Paul office seemed amenable to a settlement. But the national office in Washington, D.C., refused, insisting that the client had not filed at all. “That was the point where we decided, ‘We’re not going to take this. We’re going to litigate,’” she said.
The tax court is based in D.C. but moves around the country, and the client did not get a hearing in St. Paul until two days after Rice graduated in May of 2024. “I was so nervous. I had no real litigation experience,” she recalled. After sifting through all the materials, the judge requested briefs. But one day before they were due, the IRS called Smith and told him not to bother submitting his: they had decided to settle after all, canceling the client’s debt and even agreeing to pay the annual refunds they had withheld during the period of the dispute—interest included.
It was, Smith said, a “pretty fantastic result.” Yet he and Rice can’t help but wish that they’d had the chance to win their case in court, if only because of the precedential effect such a victory would have had for all the other low-income taxpayers who may be seeing their electronically filed returns rejected on similar technicalities.
“Think of all the people who are falling through the cracks,” Smith said.