Legal Definitions - prior-claim rule

The prior-claim rule is a fundamental legal principle in tax law that dictates a taxpayer must first formally present their claim or dispute to the Internal Revenue Service (IRS) through its administrative processes before they can file a lawsuit against the IRS in court. This rule applies when a taxpayer seeks a tax refund, a reduction in their tax liability (an abatement), or challenges a penalty. Essentially, it ensures the IRS has an opportunity to review and resolve the issue internally before the matter escalates to the judicial system.

Here are some examples illustrating the prior-claim rule:

• Scenario: Seeking a Tax Refund for an Overpayment

  Example: Sarah filed her tax return and later discovered she forgot to claim a significant deduction for business expenses, leading her to overpay her taxes by several thousand dollars. She wants to get this money back.

  Application of prior-claim rule: Before Sarah can sue the IRS in federal court to recover her overpayment, she must first file an amended tax return (Form 1040-X) with the IRS, formally requesting the refund. The IRS will then review her claim. Only if the IRS denies her claim, or fails to act on it within a specified period, can Sarah then proceed to file a lawsuit in court.

• Scenario: Disputing an IRS Tax Assessment

  Example: A small business, "Green Thumb Landscaping," receives a notice from the IRS stating they owe additional taxes for a previous year, along with penalties, due to an audit finding. Green Thumb Landscaping believes the IRS auditor made an error in disallowing certain legitimate business deductions.

  Application of prior-claim rule: Green Thumb Landscaping cannot immediately sue the IRS to challenge this assessment. Instead, they must first follow the IRS's administrative procedures, which might involve appealing the audit findings within the IRS, filing a protest, or responding to the notice of deficiency. Only after exhausting these internal IRS avenues can the business take the matter to court to seek an abatement (reduction) of the disputed tax and penalties.

• Scenario: Challenging an Assessed Penalty

  Example: Mark, a freelance graphic designer, was assessed a penalty for failing to make estimated tax payments on time, even though he believes he had reasonable cause for the delay due to a severe family emergency that prevented him from managing his finances.

  Application of prior-claim rule: Mark cannot directly sue the IRS to dispute the penalty. He must first submit a formal request to the IRS, typically in writing, explaining his reasonable cause and asking for the penalty to be abated. The IRS will review his explanation. If the IRS denies his request to remove the penalty, Mark would then have the legal standing to potentially pursue the matter in court.