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.