Once a taxpayer overpays a tax, it is necessary to file a claim for refund before any action can be undertaken to seek a refund of such tax from the government. The purpose of the claim for refund is to place the IRS on notice of an alleged overpayment. A taxpayer cannot require the IRS to make a credit or refund without filing the claim. In addition, a claim for refund is a prerequisite for suing in the U.S. District Court or the U.S. Court of Federal Claims. It also protects the overpayment of taxes if the statute of limitations expires. Claims for refund take many forms, but most typically are Forms 1040X and 1120X, amended returns for individual and corporate income taxes. Refund of other taxes requires regular forms which should be marked “amended” and show an overpayment. The courts have recognized many forms of claims for refund, including informal letters from taxpayers to the IRS. Form 843 should be used when filing claims for refunds for any taxes other than income taxes.
The preparing and filing of a claim for refund should be handled with care. Only one taxable period and one type of tax should be set forth on any claim. The claim may cover several different issues for the same taxable period and type of tax. The claim must be in writing under the penalties of perjury, and each and every ground upon which the taxpayer relies must be set forth in detail, plus sufficient facts to place the IRS on notice as to the taxpayer’s claim. The claim should demand the dollar amount sought as a refund, plus any other amounts which are legally refundable – including interest. In addition, the claim must be signed by the person who signed the return or, if a corporate return, by an officer of the corporation. To file a claim for refund there must have been an overpayment of tax, which could include:
- Excessive withholding
- Estimated tax payments exceed actual liability
- Payment in error when no liability exists or amounts owed are overstated
- Tax assessed or collected after statute of limitations has passed
A claim must be filed by the taxpayer or his authorized agent and cannot be made by a third party who pays taxes for a taxpayer. It should be filed with the same Service Center where the original return was filed, regardless of relocation of the taxpayer.
The term overpayment is not specifically defined in the Code; however, it does provide that certain amounts are to be treated as overpayments under the Internal Revenue Code. Further, the Supreme Court has defined an overpayment as “…any payment in excess of that which is properly due.”
Importance of Claim
A claim for refund is the starting point for the IRS to determine if the taxpayer is entitled to a refund. A claim for refund that is improperly prepared is invalid and the mistake can be fatal to a claim if the time for filing the claim for refund is about to expire. The claim for refund is the basis upon which a future lawsuit may be brought against the United States over the disputed overpayment.
Main Ingredients of a Claim
- Amount—Dollars claimed, or such greater amount as may be allowed by law, plus interest
- Grounds—Include every ground imaginable; if not asserted now, may not be asserted later. Also, failure to include an argument could result in an inability to assert it in later litigation under the variance doctrine
- Supporting facts—Detailed statement of facts forming the basis of each ground
- Made under penalties of perjury.
Time Limits for Filing Claim
The time in which a claim for refund may be filed is limited. The failure to file a claim for refund within this period will keep the taxpayer from ever having the chance to recover the overpayment of any taxes from the United States even if the taxpayer is entitled to a refund of the overpayment. Claims for refund must be filed within the later of:
- Three years from the date the return in question is considered filed
- Return filed before due date—time period runs from due date
- Return filed after due date—time period funds from actual date of filing
- Two years from the date the tax is paid if not paid when return was filed
- Withholding and estimated tax payments considered paid on due date of return
- Tax paid after due date of return—time period runs from actual payment
There are also additional considerations which must be considered when the statute of limitations has been extended by the using Form 872 or some other form. Generally, in this situation, there is a limited period time in which a claim for refund can be filed for taxes paid with the original return after the expiration of the time set forth in the Form 872. Bad debts, worthless securities, net operating losses, carrybacks and foreign tax credits have varying periods in which a claim for refund can be filed, and in any situation when a claim is filed, the time for filing such claim should be reviewed with respect to the applicable taxes involved.
Limitations on Refund
A timely filed claim is limited to the tax paid during the preceding three years from the time the return was filed, plus the period of any extension for filing the return. A claim filed after the three-year period is limited to the tax paid in the preceding two years.
Interest on Refunds
The IRS is required to pay interest on overpayments. The exception is that no interest is due if the refund is made within 45 days from the due date of return or actual date of filing, whichever is later.
IRS Action Upon Receipt of Claim
Upon receipt of the claim, the IRS may audit or reaudit the return and not just the claim. The tax for the year may be redetermined even if the return has been previously audited. If the tax as redetermined exceeds the claim, there is no refund.
Recovery of Erroneous Refund by IRS
If the IRS makes a mistake and gives a refund in error, the IRS may recover the refund. The IRS is entitled to recover the refund plus interest. If the IRS must file a lawsuit, the lawsuit must be within two years of payment of the refund – usually determined from the date on the issued refund check. If the IRS can prove that the refund was obtained by fraud or misrepresentation, then the IRS has five years to bring suit.
Disallowance of Claim
If the IRS disallows a claim for refund, the taxpayer will receive a Notice of Disallowance. The taxpayer is entitled to an appeals conference with respect to the disallowance of the claim. Once the claim is disallowed, the taxpayer has two years from the date of the notice of disallowance to file suit.
Penalties for Excessive Refunds
Section 6676 of the Internal Revenue Code imposes a penalty on a taxpayer who files a claim for refund or credit of income tax in an amount that is determined to be “excessive.” The penalty is 20 percent of the determined “excessive” amount and was implemented for claims filed after May 25, 2007. Very little guidance exists on how the IRS determines what is “excessive” but the penalty is supposed to act as a deterrent to over aggressive tax positions in refund claims.