By Thane Grauel

WESTPORT — There’s an old saying, you can’t fight City Hall.

But what happens when Town Hall takes on a big daddy of bureaucratic buttresses like the Internal Revenue Service?

The town’s taxpayers will eventually find out — there’s a case involving employee payroll taxes being heard in federal court titled Town of Westport vs. United States of America.

It was filed Sept. 13, 2023, in U.S. District Court for the District of Connecticut. At that time of its filing, it sought the refund of almost a half million dollars in “overpaid taxes, penalties and accrued assessed interest.” (First Selectwoman Jennifer Tooker told the Westport Journal this week that the IRS already has refunded some money, but she didn’t say how much.)

The lawsuit alleges that although the town paid its employee payroll taxes for 2020 in a timely manner, the IRS improperly made a series of transfers between different quarters, which led to supposed underpayments and then penalties and interest.

The 10-page suit, filed on behalf of the town by lawyers from Pullman & Comley in Bridgeport, details a series of those transfers and the effects they caused. It also states the IRS took actions without notifying the town, denying it the opportunity to appeal them.

“The town attempted to contact the IRS on numerous occasions to determine why it was continuing to receive inaccurate notices reflecting a balance of unpaid taxes, penalties, and interest for Q1 2020 when it had accurately and timely deposited substantially all tax due, but did not receive a response,” the suit reads.

“On September 30, 2022, the Town spoke with IRS agent badge #1003959721 who confirmed that there was a balance due for Q1 2020 of $423,186.97,” it reads. “To avoid being assessed additional penalties and interest, the Town immediately remitted payment in full the same day.”

“On November 30, 2022 the Town filed a Request for Refund seeking a refund of the $423,186.97 it paid on September 30, 2022, less the $296.25 shortfall, and any penalties and interest attributable thereto …” the complaint reads. “To date, the Town has not received a response from the IRS regarding its Request for Refund.”

Tooker explained the town’s position.

“In September 2023, the Town brought an action against the Internal Revenue Service seeking a refund of employment payroll taxes that were paid under protest for the first and fourth quarters of 2020,” she wrote. “The Town brought the lawsuit because we believe that all payroll taxes that were due were timely deposited and paid by the Town during each of the respective quarters, and the Town complied with all IRS filing requirements.”

“Despite the Town’s compliance, the IRS imposed certain charges that were not due, and the Town was required to pay those amounts before it could seek a refund,” she continued. “We are seeking the return of several hundred thousand dollars from the IRS.”

“The action is continuing to be litigated,” Tooker said, “however, in light of questions that have recently been raised about the litigation, we wish to clarify that we believe the Town is entitled to a refund of the full amount being sought in the action.”

“I am pleased to inform you that since the Town filed the lawsuit, the IRS has already issued a partial refund,” Tooker said. “In accordance with our policy of not to comment on ongoing litigation, the Town has no further comment on this matter at this time; however, we will let the Town know of the final outcome when that occurs.”

While the town might have had difficulty getting timely responses from the IRS, the Department of Justice has filed a response to the suit, and an updated response/counterclaim. The DOJ addressed the town’s allegation in a 25-page document.

Government lawyers appear to argue that some of Westport’s payments and paperwork were filed late.

“The government seeks Judgment against the Plaintiff Town of Westport and in favor of the Defendant United States, finding that there is no refund or credit due for employment taxes, penalties, or interest for the first and fourth quarters of 2020 and, if there is an overpayment created for the Case … first quarter of 2020 based upon the reversal of credits, apply that overpayment as a credit to any liability of Westport in accordance with 26 U.S.C. § 6402 and other applicable law,” their reply reads.

It also seeks “Judgment in favor of the Counterclaim Plaintiff United States of America and against the Counterclaim Defendant Town of Westport in the amount of $64,205.89 for the reversed credits, or such other amount that the Court determines under applicable law, plus late-filing and late-payment penalties under 26 U.S.C. § 6651, penalties for failure to timely make deposit of taxes under 26 U.S.C. § 6656, and interest pursuant to 26 U.S.C. §§ 6601, 6621, and 6622, and 28 U.S.C. § 1961(c), after the reversal of the overpayment credits for the employment tax account for the fourth quarter of 2020; and, Such other and further relief as the Court determines is just and proper.”

Thane Grauel grew up in Westport and has been a journalist in Fairfield County and beyond for 36 years. Reach him at editor@westportjournal.com. Learn more about us here.