Topical Index to Chapter 9 Claims Practice 9.01 Claims Basics Claim defined Post-payment appeal process Sharp practice Requirements for claim Contents of claim Typical Claim forms: Form 1040X Form 1120X Form 843 Claim lawsuit parameters Filing of claim 9.02 Statute of Limitations 6511 2 year/3 year rule Suspension for disability Physician certification requirement Effect of extensions Informal claim doctrine 9.03 Full/Divisible Payment Rules Flora full payment rule Steele divisible tax rule 9.04 IRS Claims Procedure Filing with Service Center Initial review of claim Revenue Agent review of claim Thirty-Day Notice Notice of partial or full disallowance of claim Refund suit limitation period
IRS offset right 9.05 Resort to Courts 7422 claim required 6-month waiting period 2-year outside limitation 6532(a) 9.06 Choice of Judicial Forum Weighing precedents Advantage of pre-payment appeal process Increase deficiency possibility in Tax Court Limitation of increase deficiency in District Court/Claims Court IRS right of setoff Claims Court 9.07 Claim Look-Alikes Claim for Abatement 6404(a) No payment requirement Grounds for Claims for Abatement Administrative discretion to accept Filed on Form 843 Form 1045 and Form 1139 quickie refund Protective claims Form of protective claim Amendment of protective claim 9.08 Tax Payments Date of payment rule determines claim allowance 2-year/3-year rule Withholding payment rule Estimated tax payment rule 9 Claims Practice
9.01 CLAIM BASICS A claim is notice to the IRS that a taxpayer has overpaid his or her tax and requests its return. The practitioner s opportunity to use a claim may arise in various situations. In the ordinary case, claims may be filed to claim deductions, credits, losses, and other adjustments to a filed tax return including abatement of assessments and penalties. The taxpayer has simply forgotten to deduct all of the potential allowable expenses and when further expense allowances are allowed, a refund from the IRS is in order. The filing of a refund claim begins the post-payment appeal process and the taxpayer bears the burden of proof to show the correct tax liability for the year of the claim. As with the deficiency procedure, the IRS assessment is presumed correct and the taxpayer must show his entitlement to a refund by a preponderance of evidence. Although most claims will not be considered in the Tax Court, it can eventually find its way to the U.S. District Court or U.S. Court of Federal Claims for independent judicial review. Among the various other paths that the practitioner may take with claim problems are the following: Request an IRS Agent s Report, agree to the deficiency, pay the tax, and file a refund claim in order to further challenge IRS findings after the tax is paid; or Agree with the findings of a Revenue Agent or the Appeals Branch, sign Form 870, pay the tax, and file a refund claim; or File a refund claim after a mutual concession, Form 870-AD, is executed in the Appeals Branch. The practitioner must consider carefully the use of the sharp practice of agreeing with the IRS and then filing a refund claim thereafter. No purpose will be served if the practitioner is attempting to have an administrative settlement of the matter. In point of fact, when possible, the refund claim will be sent to the same Revenue Agent who handled the audit examination itself or to the Appeals Officer who handled the matter on review. Cases have held that signing Form 870 does not, however, prevent filing a claim for refund and pursuing judicial action. Smith v. U.S., 328 F.3d 760 (5th Cir. 2003). Exhibit 9-1 Claims Procedure Tax Paid
Claim Form filed with IRS Service Center Claim can be approved by Service Center and refund check issued or Sent to IRS Examinations and IRS Revenue Agent assigned to audit claim Agent can approve claim partially or in full If not approved, Thirty-Day Notice issued Practitioner files Protest in Appeals Branch Most claim cases settled in Appeals If not approved, Notice of Claim Disallowance will be issued Practitioner files complaint in Federal District Court or Claims Court within 2 years of Notice of Disallowance The law requires no specific form for claim filing, but the Regulations require that the claim: Be in writing; Set forth the facts; Indicate the specific grounds for refund; Request a refund be paid; Be signed by the taxpayer (or his representatives) under penalties of perjury; The IRS has developed numerous claim forms, of which Form 1040X (for individual income tax claims), Form 1120X (corporate tax claims), and Form 843 (for all other taxes other than income tax), are the most popular. The claim can only be filed, of course, after payment of the tax has been made. The claim filing can be equated with the first filing of pleadings in litigation matters. The law requires that IRS be put on notice as to the grounds for the taxpayer s claim. The practitioner must understand that the grounds for the claim will limit the parameters of any suit in district
court or Claims Court based on that claim. The IRS will challenge any refund suit on the grounds of variance if the claim and lawsuit are predicated on different grounds. Even if the taxpayer claims the tax to be unlawful and IRS denial is certain, a claim must still be filed to create jurisdiction in court. U.S. v. Clintwood Elkhorn Mining Co., 128 Sup. Ct. 1511 (2008). Like all important documents filed with the Internal Revenue Service, claims should be filed by Certified Mail or Registered Mail, physical delivery, or IRS-approved overnight carrier. The mailbox rule applies to claim filing. That is, the claim is deemed filed on the date mailed. 7502. The use of private postal meters will not come under the timely mailing rule unless the documents are also received by the IRS as they would have been if sent by U.S. mail. In Estate of Kalman v. U.S., 2006-1 U.S. Tax Cas. (CCH) 50,206 (D.S.C. 2006), a district court determined that an estate filed its refund claim untimely, because the estate did not satisfy the timely mailing/timely filing rule. The envelope in which the claim was sent used a private postage meter and did not apply any date to the envelope. The court found that the lack of the postmark was the fault of the estate attorneys who mailed the claim. Note that the mailbox rule does not apply to complaints filed in the U.S. District or Claims Courts. Note also that penalties exist for filing frivolous documents with the IRS, which include claims. See Chapter 11. 9.02 STATUTE OF LIMITATIONS The filing of the refund claim must be made within the statute of limitations provided in Section 6511. Generally, claim filing must occur within three years from the time a return was filed or two years from the time a tax was paid, whichever is later, or if no return is filed, within two years of the time the tax was paid. Section 6511 contains a two-prong test: Is the claim timely filed and then how much can the client be refunded? An example of the application of the three-year rule follows: The taxpayer files a 2005 income tax return timely on April 15, 2006. A refund claim relating to that tax return can be filed any time before April 15, 2009. All tax paid with the return or any payments made during the preceding three-year period can be refunded to the taxpayer. The two-year time limitation is illustrated as follows: The taxpayer files the same 2005 income tax return, is audited in 2008, grants an extension of the assessment period to April 15, 2010. An assessment is made following the audit examination, which is paid on June 30, 2009. The practitioner can file a refund claim anytime before June 30, 2011 and obtain a refund of tax paid on June 30, 2009 and the