The Fine Print in the IRS Refund Payment Rules

Published Categorized as Refund Claims, Tax
waiting for an IRS refund

Our tax laws have a number of arbitrary deadlines which often result in problems for taxpayers, rather than the IRS. Late submissions usually mean that the taxpayer ends up paying more tax than they actually owe.

However, there are a few timing rules that apply to the IRS, one of which involves the time frame for issuing a refund to the taxpayer. This can also result in a loss for the taxpayer, but it is an issue that IRS employees often try to find a solution for.

The IRS is obligated to make its legal advice publicly available, including emails from its attorneys to various employees. One such email was recently disclosed, in which an IRS attorney was advising an Appeals Officer on whether a refund could be issued after the designated time frame. The email has been assigned the number CCA 2022070118142704, if you wish to find a copy.

This email provides insight into the refund payment rules, and hopefully, if you are reading this, it is for educational purposes or out of curiosity, rather than due to a lost refund situation.

Refund Claim Filing & Payment Rules

The tax code sets out the time limits for taxpayers to file for a refund claim. The rules for filing refund claims are set out in Section 6511. For most income tax claims, this is the familiar rule of two years from the date of payment or three years from the date the original tax return was filed, whichever is later.

There is also a time limit for the IRS to issue refunds once a claim has been filed. These rules are set out in Sections 6532 and 6514. Section 6532 provides the time limit that a taxpayer has for filing suit against the IRS to collect a refund. It is generally two years from the date of payment. Section 6514 builds on Section 6532 by saying that the IRS cannot issue a refund if the two-year period to bring suit has expired.

This issue usually comes up in one of two situations, namely, (1) the IRS agrees that a refund is due but is having difficulty processing the claim or (2) the taxpayer has filed an administrative protest for the refund claim and the IRS Office of Appeals does not get to the case before the two year period expires. In both instances, the IRS is typically barred from issuing a refund even if it agrees that a refund is owed.

The Form 907 Agreement to Extend Time

One solution is for the taxpayer and IRS to agree to extend the two-year period. The Form 907, Agreement to Extend Time to Bring Suit, is used for this very purpose.

As its name implies, Form 907 is used to extend the time for the taxpayer–or the IRS–to bring suit on the refund claim. The form has to be signed by the taxpayer (or their attorney) and the IRS prior to the expiration of the two-year period.

The drawback of Form 907 is that it is up to taxpayers to know of this form and track the two-year period and track down an IRS employee who is able and willing to sign the form. Suffice it to say that consideration of Form 907 usually happens after the two-year period has lapsed and the parties are looking for a way to have the refund issued.

Absent an executed Form 907, the taxpayer’s only other remedy is to file suit against the IRS before the two-period expires.

Refund Claims in IRS Appeals

The situation where the taxpayer filed an administrative protest and is waiting for the IRS Office of Appeals is even more troubling. The taxpayer may not have filed a refund claim in these cases.

Instead, the taxpayer may have just filed an original return and the IRS conducted an audit and proposed adjustments to it, but the taxpayer also had other issues that warranted a refund that was not included on the original tax return. These may have been submitted to the IRS exam function as an “affirmative adjustment” or as a comment in the written protest.

This seems to be the very situation that was involved in the IRS email noted in the introduction to this article. The IRS email was authored by the IRS Office of Chief Counsel attorney to an IRS appeals officer who was apparently trying to find a way to get the IRS to issue a refund. The IRS appeals officer was inquiring about whether the tax return extension form that the taxpayer filed could be treated as an informal refund claim.

About Informal Refund Claims

While the IRS publications and forms suggest that one has to file a refund claim using the IRS forms and one has to file the form with the IRS office listed in the IRS’s notices and publications, the courts have not been as strict. The courts have long recognized that some filings are refund claims even though they do not comply with these technical formalities.

The IRS attorney in the email cited Kaffenberger, 314 F.3d 944 (Ct. Cl. 2003) and the IRS’s prior Action on Decision issued in response to the court case.

The Kaffenberger case involved a tax refund for the year 1989. The IRS argued that the Kaffenbergers were not eligible for a refund because they failed to bring their administrative refund claims within the required time frame, as outlined in the tax code. The Kaffenbergers, on the other hand, claim that they made an informal claim for refund when they designated a portion of a prior credit towards their 1990 tax liability on a form filed within the required time frame. The district court accepted the jury’s determination that the Kaffenbergers had made an informal claim, but the IRS argued that there is no evidence to support this finding. The appeals court held that an informal claim depends on the individual facts of each case and whether the IRS knew or should have known that a claim was being made. The appeals court held that the informal claim was sufficient even though it was only partially informative and had some deficiencies.

The IRS attorney who authored the email here, concluded that this court case was not applicable as the facts were different in the present case. Apparently, the extension at issue, in this case, did not set out the basis or theory for why a refund was owed to the taxpayer. The IRS attorney states that this is a critical aspect of refund claims and, absent such a disclosure, the extension form could not be a refund claim.

The result was that the IRS Office of Appeals had no remedy to force the IRS to pay a refund that it agreed was due and owing to the taxpayer.

The Takeaway

This IRS email highlights the significance of monitoring refund claims. If the taxpayer is entitled to a refund and it has been provisionally rejected by the IRS, they only have a two-year timeframe to prompt the IRS to issue the refund. The taxpayer must take proactive measures to request and obtain the IRS’s signature on Form 907. In situations involving IRS appeals, the taxpayer must also ensure to submit a refund claim, ideally a formal claim using the IRS’s prescribed forms.