CCA on Application of Refund Statute of Limitations in OVDP (5/15/17)

In CCA 201719026 (4/12/17, released 5/12/17), here, an IRS Senior Technician Reviewer responds to the following:

Your office has received a number of questions from OVDP examining agents about taxpayers who report additional income and tax on their amended returns for most of the years in the disclosure period, but report an overpayment on their amended return for at least one of the years at issue. A typical fact pattern might involve a taxpayer for whom the disclosure period is tax years 2003 through 2010. For tax years 2003 through 2007 and 2009 and 2010, the taxpayer reports additional income and tax. But the amended return submitted for tax year 2008 includes a large loss, resulting in an overpayment for that tax year. After reviewing the amended return, the examining agent confirms the claimed loss and the resulting tax computations show an overpayment for tax year 2008. The taxpayer then requests that the overpayment for tax year 2008 be credited against increases in tax for the other tax years in the disclosure period or the miscellaneous offshore penalty. You have asked for advice regarding how I.R.C. §§ 6511 and 6514 affect the Service’s ability to credit the overpayment as requested by the taxpayer.

The author then discusses the law apply under certain possible scenarios.  Since the analysis is succinct, I will just refer readers to it.

A short summary of the answer to the "typical fact pattern" disclosed is that, assuming the original 2008 return was timely filed, the period for claiming a the refund expires 3 years after the date of the filing (or deemed filing).  Hence, if the amended return filed in OVDP was submitted on or before that 3 year period expired, then the refund is timely and the refund can be resolved in the OVDP proceeding (either by refund or credit against other years).  And, depending upon the facts, the filing of the claim for refund by amended return in the OVDP proceeding might be timely.

Although the author of the CCA does a very good job of discussing the rules, I offer the following from the current operating draft for the next edition of my Federal Tax Procedure book:

Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government.  There are two applicable rules. 

First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 

Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 

Watch the Refund Statute of Limitations on OVDP Payments Related to Income Tax (11/16/13)

The 2012 OVDP FAQ 25, here, requires that the full package include various documents (amended returns for the 8-year period, etc.).  Contemporaneously (or before) the taxpayer should send the following to a separate address (from  the 2012 OVDP FAQ):

A check payable to the Department of Treasury in the total amount of tax, interest, accuracy-related penalty, and, if applicable, the failure to file and failure to pay penalties, for the voluntary disclosure period must be sent along with information identifying the taxpayer name, taxpayer identification number, and years to which the payment relates to the following address.

If the taxpayer does not opt out of the OVDP penalty structure, there are no glitches in this payment system that I am aware of.  If the taxpayer opts out, however, and the IRS has posted the remittances as payments to years that, by the time of the resolution of the opt out, are closed for refund claims, the IRS takes the position that it cannot refund any tax, penalty or interest overpaid -- either overpaid with the original return or the payment under FAQ 35.

The reason for this position is that Section 6511(a) and (b), here, preclude the refund.  Readers can read the statute itself at the link.  The following is my explanation of the two statutes of limitations on refunds from the current draft of  my Federal Tax Procedure Book (footnotes omitted):

First, there is a statute of limitations for filing the claim for refund.  A claim for refund must be filed within three years from the date the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment.  § 6511(a).  Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allowing such lengthy lapses before the claim must be pursued.  The answer to that concern is in the second rule to which I now turn. 

Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule.  The IRS may only refund the amount of tax paid within three years  plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim.  § 6511(b)(2).  This is called the “lookback” rule. 

The key for OVDP purposes is the second rule relating to possible refunds on the opt out arising from the FAQ 35 payments.  Taxpayers and practitioners should be alert to protect the refund statute of limitations for those payments and must act within the two year period from the date of payment.

A Stupid -- At Least Unfair -- IRS OVDI/OVDP Trick; Denying Overpayment Credit for Barred Years (8/13/12)

I write to rant about a practice inside the OVDI/OVDP civil penalty structure.  I start with the relevant Code sections, 6501, here, and 6511, here.  Section 6501(a) provides a 3 year statute of limitations for assessments.  Section 6501(c) provides certain exceptions to the 3 year limitations on assessments.  The key exception for present purposes is the Section 6501(c)(1) "a false or fraudulent return with the intent to evade tax," for which there is no statute of limitations.  (I ignore the 6 year statutes of limitations that might apply, and assume for present purposes they do not apply.)  Section 6511(a) provides a statute of limitations for refunds.  Basically, the taxpayer filing a timely original return and paying the tax has 3 years in which to file a claim for refund of the tax.

The OVDI/OVDP programs have involved a lookback window from 2003 forward.  (I ignore the possibility of a later starting date under 2012 OVDP but even if a later starting date were involved, the concepts discussed in this blog would still apply.)  The taxpayer is required to file amended returns during that lookback period and pay all applicable taxes.

Commenters to other blog entries have noted that, if there are refunds due for years for which refund is barred under the above rules, the IRS will not give the taxpayer credit for those refunds against taxes reported on the amended returns for years in the lookback window.  Here is an example:

2003 – additional tax reported on the OVDP/OVDI amended return - $1,000.
2004 – refund of tax paid with original return but claimed for first time on OVDP/OVDI amended return – ($1,000)
2005 – additional tax reported on the OVDP/OVDI amended return - $1,000.

Assume the years 2003-2005 are closed for assessments and refunds.  As to assessments, assume that the IRS has not made a specific finding of fraud as to the taxpayer and, should it investigate, could not prove fraud by clear and convincing evidence so as to invoke Section 6501(c)(1).   In this case, the IRS will not give the taxpayer credit for the $1,000 overpayment for 2004, even though it collects the underpayments for 2003 and 2005.

Protecting the Refund Statute of Limitations for those in OVDI (1/4/12)

I state the issue of this blog in layman's terms first.  The issue is whether the statute of limitations for refund claims might upset the normal expectations of persons entering the OVDI program.  The answer to that question is perhaps.  I will try to explain more detail below, but the problem is the way the tax statutes of limitation work.  Just as the statute of limitations may prevent the IRS from assessing tax that might have otherwise been due for a year barred for assessment, so the statute of limitations prevent the IRS from refunding a tax paid for a year barred from filing a refund claim.  The protective fix for the potential problem -- and it really may only be a potential problem rather than a real one depending upon future administration of OVDI and the opt out procedures -- is for the taxpayer to file a written protective refund claim (formal or informal) within the normal statute of limitations for refunds of any taxes paid pursuant to the programs or the opt out  procedures.

Let me illustrate the problem in an example.  Taxpayer A joined the OVDI program on August 1, 2011.  Taxpayer A submitted the OVDI package on September 9, 2011 (the extended due date for submission).  Along with the package, the taxpayer calculated and remitted by check the income tax, income tax penalty and interest on the income tax and income tax penalty for the years 2003 through 2010.  Pending further processing, the IRS posts the payments as calculated to the respective years pursuant to the taxpayer's calculations.  (I have some anecdotal evidence that the IRS may be doing an interim posting to the year 2007 for all amounts paid, even  if according to the taxpayer's calculations they relate to years other than 2007; let's set that aside for later consideration and just assume that the IRS posts to the years 2003 forward as the taxpayer has indicated.)  That means that some portion of the tax, penalty and interest gets allocated to tax years beyond the normal three year statute of limitations on assessment.  Although we are talking here about refunds, the statute of limitations on assessment is important because, although, inside the programs, the statute of limitations is irrelevant, if the taxpayer opts out of the program, the IRS will only be able to assess tax for the years that are otherwise open.  That means any tax allocated to years that are otherwise closed for additional assessments is, under the law, an overpayment of tax that should be refunded.