A Pennsylvania electrical contractor just spent nearly a decade fighting to get back $1.53 million it paid the IRS — and the outcome of that fight came down to a handful of sentences in a letter its lawyers mailed years before anyone had filed a lawsuit. On July 15, 2026, the U.S. Court of Appeals for the Federal Circuit ruled in Dougherty Electric, Inc. v. United States that the company could keep pursuing part of its refund, but not all of it — and the dividing line wasn't the merits of the tax law. It was whether the company had said the magic words to the IRS at the right time.
This is a case worth understanding even if you'll never come close to a seven-figure tax dispute, because the procedural trap that tripped up Dougherty Electric — a rule tax lawyers call the "variance doctrine" — applies just as forcefully to a $4,000 refund claim as it does to a $1.5 million one. If you ever ask the IRS for money back, this case is a preview of exactly how that request can go wrong.
How a Payroll Scheme Turned Into a Seven-Figure Bill
The facts go back further than the lawsuit itself. Between 2001 and 2005, Dougherty Electric's sole shareholder ran a scheme involving the company's payroll and employment tax withholdings. He was ultimately prosecuted, pleaded guilty to tax evasion, and a federal district court in the Eastern District of Pennsylvania ordered him to pay criminal restitution — the court's way of making the government whole for the tax loss his conduct caused.
Restitution orders like this one don't automatically become a tax bill. Congress had to build a bridge between the criminal justice system and the tax system, and it did so in IRC Section 6201(a)(4), which lets the IRS assess and collect court-ordered restitution for a tax offense as if it were a tax itself. Once that bridge exists, the IRS can use its full toolkit — assessment, liens, levies — to collect the restitution amount from the person or entity who owes it.
That's what happened here. The IRS audited Dougherty Electric, assessed employment taxes and civil fraud penalties tied to the underlying conduct, and the company paid more than $1.5 million to satisfy the bill. Then it went looking for a way to get some of that money back.
Two Different Theories, Filed at Two Different Times
Refund claims aren't informal requests — they're a specific administrative filing governed by IRC Section 7422, and the IRS's regulations require the taxpayer to lay out, in writing, exactly what the claim is and why the taxpayer believes it's owed money. Dougherty Electric filed a timely letter with the IRS on December 7, 2017, built around a single legal theory: that penalties and interest cannot lawfully be layered on top of a restitution-based assessment.
That theory had real teeth. Just months earlier, the U.S. Tax Court had decided Klein v. Commissioner, 149 T.C. 341 (2017), holding that criminal restitution is not "a tax imposed by this title" within the meaning of IRC Section 6601 — and if it isn't a tax under Title 26, the IRS has no statutory basis to charge underpayment interest on it, or failure-to-pay additions under Section 6651(a)(3). The IRS's own internal guidance (Internal Revenue Manual 25.26.1) later fell in line with Klein, directing examiners not to pile interest and certain penalties on top of restitution-based assessments unless a sentencing court had specifically included them in the restitution figure. Dougherty Electric's December 2017 letter invoked exactly this theory.
Later — after the window to file a new, independent refund claim had already closed — the company's lawyers raised a second argument in a follow-up letter: that the civil fraud penalties themselves were invalid because no IRS supervisor had given the written approval required by IRC Section 6751(b)(1) before the penalties were assessed. That's a real and increasingly litigated requirement (it's the same provision behind the Graev and Chai line of Tax Court cases), but the problem for Dougherty Electric wasn't whether the argument was good. It was whether the company had preserved the right to make it.
The Variance Doctrine: Why "You Never Told Us That" Can Kill a Valid Claim
This is the part of the opinion that matters far beyond one Philadelphia contractor. Before a taxpayer can sue the government for a tax refund, Section 7422(a) requires that a proper administrative claim be filed first — and Treasury Regulation 301.6402-2(b)(1) says that claim has to set forth, in detail, each ground the taxpayer is relying on. Courts have built a strict rule on top of that requirement, known as the variance doctrine: if a legal theory wasn't fairly presented in the original administrative claim, a taxpayer generally can't raise it for the first time in the lawsuit that follows. The IRS is entitled to know, while the claim is still open, exactly what it's being asked to reconsider — not to be surprised by a new argument once the case reaches court.
The U.S. Court of Federal Claims applied that doctrine to dismiss Dougherty Electric's entire case, reasoning that neither of its two theories had properly cleared the variance hurdle. On appeal, the Federal Circuit (in a precedential opinion by Judge Sharon Prost) split the difference:
- The restitution/Klein theory survived. The court held that the December 2017 letter had adequately raised this theory within the claim period, so dismissing it for variance was error. The court vacated that part of the dismissal and sent the case back to the Court of Federal Claims for further proceedings on the merits.
- The supervisory-approval theory did not survive. Because it first surfaced only after the window for the original claim had closed, and wasn't fairly encompassed by what the December 2017 letter actually said, the Federal Circuit affirmed its dismissal. That argument — regardless of how strong it might otherwise be — is now gone from the case for good.
In other words: the same taxpayer, arguing about the same underlying $1.5 million payment, ended up with one theory alive and one theory dead, purely because of what was and wasn't written down in a letter years before any lawsuit existed.
The Lesson for Everyone Else: Refund Claims Are Not the Place to Improvise
Very few small businesses will ever face a restitution-based assessment. But the variance doctrine touches something much more common: any time a business files IRS Form 843 (Claim for Refund and Request for Abatement), an amended return claiming a refund, or a protest letter during an audit that includes a refund component, that filing is doing double duty. It's not just a request — it's the taxpayer's one shot to put every legal theory on the table before the clock runs out.
A few practical takeaways follow directly from how this case unfolded:
Write down every theory you might ever want to argue, not just your best one. Dougherty Electric's team clearly understood the restitution/interest theory was strong when they filed in 2017. What they didn't do — or didn't do clearly enough — was also flag the supervisory-approval issue at the same time, even as a secondary or alternative ground. By the time that argument occurred to them, it was too late to add it. If there's more than one reason you think you're owed money, say so explicitly, even if one argument seems obviously stronger than the others.
Know your deadline, and treat it as immovable. Refund claims generally must be filed within the later of three years from when the return was filed or two years from when the tax was paid (IRC Section 6511). Once that window closes, you don't get a second chance to introduce a new legal theory tied to the same payment — you can amend or supplement the facts, but you can't smuggle in an entirely new argument after the fact. If you're not sure whether you've covered every angle, that uncertainty needs to be resolved before the deadline, not after.
A detailed, over-inclusive claim costs almost nothing; a missed theory can cost everything. There's no meaningful downside to a longer refund claim that spells out multiple independent grounds for relief. The downside of a narrow, single-theory claim only shows up years later, when a second theory becomes relevant and the door has already closed.
"Fraud penalty" cases often stack more than one legal defect. Employment-tax fraud penalties frequently face challenges on more than one front simultaneously — whether the underlying conduct actually meets the fraud standard, whether interest and additions were properly computed against a restitution base, and whether the internal approval process the IRS itself is required to follow was actually followed. Treat each of these as a separate question worth raising, not a single package.
None of this is a substitute for a tax attorney when the stakes are this high — Dougherty Electric had counsel throughout, and still lost half its case to a procedural technicality. But it underscores something that applies at any dollar amount: the paperwork you file with the IRS while a dispute is still administrative is not a formality to get out of the way before the "real" fight begins in court. It is the fight, at least for defining what you're allowed to argue later.
Keep the Records That Make These Arguments Possible
Cases like this one also depend on being able to reconstruct, years later, exactly what was paid, when, and under what characterization — tax, penalty, or interest — because that's precisely what a refund claim has to specify. Businesses that keep clean, well-categorized books make it far easier to identify every dollar in dispute and every theory available to recover it, instead of discovering gaps in the record after a deadline has already passed.
Beancount.io offers plain-text accounting that gives you a fully transparent, version-controlled ledger of every transaction — including exactly how taxes, penalties, and interest were recorded and paid. That kind of detailed, auditable history is exactly what you need on hand if you ever have to substantiate a refund claim of your own. Get started for free and see why developers and finance professionals are switching to plain-text accounting.