The pandemic delays have highlighted yet one more drawback for taxpayers looking for a credit score or refund from the IRS. When a taxpayer information a declare for credit score or refund, the IRS could disallow the declare in entire or partially and subject a discover of declare disallowance – mostly a Letter 105C or 106C – denying the taxpayer’s declare. Taxpayers who problem the discover in a U. S. district courtroom or the U.S. Court docket of Federal Claims should usually file go well with inside two years from the date the discover of declare disallowance is mailed (that date is often on the highest righthand aspect of the primary web page of the discover).
Most practitioners perceive the time interval by which a refund go well with should be filed within the applicable U.S. district courtroom or the U.S. Court docket of Federal Claims to guard the taxpayer’s skill to obtain a credit score or refund. Nonetheless, taxpayers and practitioners could also be unaware that when the two-year interval beneath IRC § 6532 expires, the IRS is prohibited beneath IRC § 6514(a)(2) from making a credit score or refund except the two-year interval has been prolonged by settlement or the taxpayer has well timed filed a go well with in courtroom throughout the two-year interval. IRC § 6514(a) and (a)(2) state:
A refund of any portion of an inner income tax shall be thought-about inaccurate and a credit score of any such portion shall be thought-about void—. . . within the case of a declare filed inside the correct time and disallowed by the Secretary, if the credit score or refund was made after the expiration of the interval of limitation for submitting go well with, except inside such interval go well with was begun by the taxpayer.
In case you are working with the IRS or the IRS Impartial Workplace of Appeals (“Appeals”), don’t make the error and assume that working towards a decision equates to the IRS’s skill to pay a refund or permit a credit score as soon as the IRC § 6532 statute has expired.
Even when disputing the discover of declare disallowance administratively leads to the taxpayer and the IRS agreeing to a decision inside the two-year interval, if the IRS has not issued cost or allowed a credit score earlier than the expiration of the two-year interval, IRC § 6514(a)(2) prohibits the IRS from paying the refund or permitting the credit score. Sure, you learn that accurately. The cost should be made (or credit score allowed) throughout the two-year window except that window is prolonged by settlement (IRS Kind 907, Settlement to Lengthen the Time to Convey Go well with).
The backlog and different delays attributable to the pandemic have made it difficult for the IRS to course of a taxpayer’s dispute to a discover of declare disallowance inside the two-year interval. The delays in processing and transferring a dispute by way of the Appeals course of to finality, probably exceeding the interval beneath IRC § 6532, might have an effect on 1000’s of taxpayers. For instance, in calendar yr (CY) 2021, the IRS issued 318,957 Letters 105C and 106C; in CY 2020, it issued 205,860, and in CY 2019 it issued 379,841. (The IRS sends out many different letters that disallow claims that aren’t included in these numbers, however the 105C and 106C make up the majority of the notices of declare disallowance issued by the IRS.) TAS usually works with taxpayers who’ve points relating to the IRS’s notices of declare disallowance. In reality, in CY 2021, TAS labored with about 5,000 taxpayers who have been issued notices of declare disallowance and have been deciding whether or not to contest the disallowance.
These processing delays not solely jeopardize taxpayers acquiring a credit score or refund, however additionally they have downstream penalties for the IRS and past. For instance, if taxpayers suppose their dispute is not going to be heard or resolved inside the two-year interval, they’re extra more likely to file a refund go well with to protect the chance their refund or credit score might be allowed, producing potential pointless litigation and devotion of assets by each the IRS Workplace of Chief Counsel and the U.S. Division of Justice.
What Taxpayers and Practitioners Ought to Know When Disputing a Discover of Declare Disallowance
Two years could look like sufficient time for taxpayers to dispute a discover of declare disallowance administratively. Nonetheless, the method can and has exceeded the two-year interval. That is particularly alarming when contemplating the IRS’s present backlogs because of the impression of COVID-19. As soon as the discover of declare disallowance is obtained, a taxpayer must ship a protest to the issuing workplace contesting the disallowance. This assumes the taxpayer understands the discover and the necessities, as these notices should not at all times clear. (See the Nationwide Taxpayer Advocate 2014 Annual Report back to Congress, Refund Disallowance Notices Do Not Present Satisfactory Explanations.) With the delays in processing correspondence, these protests could sit for a lot of, many months earlier than being addressed. As soon as assigned, the IRS worker assigned to the case must receive the executive file, bundle it with the taxpayer’s protest, and ship it to Appeals for consideration. Sadly, the backlog provides extra delays to this course of. As soon as a protest is assigned to Appeals, it nonetheless must be assigned to an Appeals Officer and labored, which might be a further six to 12 months. If the problem includes whether or not the declare was well timed, and the Appeals Officer concludes that it was, the case could also be transferred again to Examination for a willpower on the deserves of the refund declare. If the IRS and the taxpayer don’t agree on the deserves, the taxpayer can file one other protest with Appeals to contest the deserves of the underlying declare and the method begins throughout. It isn’t shocking that this course of could take over two years to be resolved, exceeding the two-year interval by which a refund might have been issued (or a credit score allowed).
IRS Kind 907, Settlement to Lengthen the Time to Convey Go well with
For taxpayers who’ve disputed the discover of declare disallowance and are operating up in opposition to this two-year interval of limitations, there’s a approach to prolong the two-year interval so the IRS isn’t barred from paying a refund (or permitting a credit score) to which a taxpayer could also be entitled. Many practitioners should not acquainted with IRS Kind 907, Settlement to Lengthen the Time to Convey Go well with, which extends the two-year interval for submitting go well with and permits extra time for the case to be labored administratively. See IRC § 6532(a)(2). Taxpayers could full and submit Kind 907 for the IRS’s consideration and signature to increase the two-year interval. A number of Varieties 907 could be executed to increase the statute beneath IRC § 6532(a)(2), if every extension is executed by each the taxpayer and the IRS earlier than the prior interval has expired.
Taxpayers whose representatives have filed a Kind 2848, Energy of Lawyer and Declaration of Consultant, should you should definitely designate that signing a Kind 907 is inside the scope of illustration.
The IRS could agree to increase the interval of limitations for submitting go well with on a disallowed declare when, amongst different issues, an extension will forestall doable inequities to taxpayers. (See Inner Income Guide (IRM) 8.7.7.3.3(1).) TAS has been working with the IRS to replace its IRM to offer examples of when such an inequity may happen and has beneficial together with the next examples of causes for extending the time for suing beneath IRC § 6532(a)(2):
- The IRS requires extra time to work the declare.
- The IRS agrees a refund (or credit score) is suitable, however the refund is not going to be issued (or credit score allowed) earlier than the constraints interval beneath IRC § 6532
- The taxpayer has been adversely affected by a failure in course of, such because the case was misplaced between features, the IRS failed to contemplate extra info, or the IRS did not ahead the case to Appeals.
- TAS is working the case, however the refund is not going to be issued (or credit score allowed) earlier than the constraints interval beneath IRC § 6532 expires.
Though Kind 907 supplies taxpayers aid from the two-year time interval limitation, it comes with its personal set of challenges. As an illustration, Kind 907 should be executed by each the IRS and the taxpayer earlier than the expiration of the two-year interval. If a taxpayer is working with a consultant, an IRS agent, or an Appeals Officer, she or he could know concerning the Kind 907 choice and the best way to get it signed by the IRS. However this isn’t the case for a whole lot of 1000’s of taxpayers. As well as, solely choose people inside the IRS and Appeals have the delegated authority to execute Kind 907 on behalf of the IRS; nobody in TAS has the authority to execute Kind 907. So if a taxpayer is working with TAS, TAS will want time to get a Kind 907 countersigned by the IRS.
If a taxpayer has submitted a protest and remains to be ready for an Appeals Officer to be assigned, what ought to the taxpayer do if the tip of the two-year interval is quick approaching?
Kind 907 doesn’t embrace any directions as to the place to submit the shape when an IRS agent or Appeals Officer shouldn’t be assigned. TAS has been working with the IRS on procedures to teach workers on the significance of utilizing Kind 907 to forestall inequities and the processing necessities. TAS has additionally beneficial establishing a mail cease deal with or fax quantity for these taxpayers to submit their Varieties 907. Our concern is for taxpayers who mail a Kind 907 to the deal with famous on the discover of declare disallowance to request an extension of the two-year interval; these taxpayers might probably fall sufferer to the backlog if they can not get their Kind 907 processed and signed by the IRS inside the two-year limitation. This has the potential to disclaim 1000’s of taxpayers’ refunds or credit to which they might in any other case be entitled.
If a taxpayer has not obtained the refund (or credit score) and doesn’t have an executed and IRS countersigned Kind 907 earlier than the expiration of the two-year interval, the one recourse to obtain a refund (or credit score) might be to file a tax refund go well with within the applicable U.S. district courtroom or the U.S. Court docket of Federal Claims.
Advice: The IRS Must be Proactive in Stopping Unintended Penalties
Taxpayers should depend on the IRS to contemplate and course of their dispute to the discover of declare disallowance inside the two-year interval; in any other case, they need to file go well with to guard their rights. However pushing these disputes by way of the executive pipeline inside the two-year limitation is troublesome beneath regular circumstances, and contemplating the present backlog, I’ve considerations many of those instances is not going to be labored well timed.
The IRS ought to be capable to protect the flexibility of taxpayers to acquire refunds or credit with out submitting go well with by exercising its authority beneath IRC § 7508A and suspending the two-year interval for submitting a refund go well with in a U.S. district courtroom or the Court docket of Federal Claims for as much as one yr for all notices of declare disallowance mailed inside the final two years. The IRS has used this authority to handle the results of the pandemic on the IRS by suspending sure deadlines, together with the submitting deadlines for each submitting seasons 2020 and 2021. See Discover 2020-23 and Discover 2021-21.
The IRS might use this authority as soon as once more to handle the service heart backlogs and case processing delays ensuing from the pandemic. Thus, a common postponement of the two-year interval is the optimum answer for addressing this drawback. Even when a common postponement is utilized, the IRS additionally must proceed educating taxpayers, Appeals Officers, Income Brokers and Tax Examiners on the advantages and penalties of executing a Kind 907.
In working with the IRS, TAS is discussing different procedural choices to guard taxpayer rights together with recommending that the IRS enhance the Kind 907 course of by establishing a devoted deal with or fax line the place taxpayers can submit these varieties and really feel assured their requests might be thought-about well timed. Within the long-term, the IRS ought to discover permitting these varieties to be uploaded by way of a portal on IRS.gov.
Conclusion
When the two-year clock is ticking, taxpayers or their representatives ought to request an extension of the time for submitting go well with to offer extra time to administratively resolve the matter to both obtain a credit score or refund or file go well with. We advocate taxpayers request an extension 4 to 6 months earlier than the two-year statute expires.
If a taxpayer has not obtained the refund or credit score and doesn’t have an executed, countersigned Kind 907 earlier than the expiration of the two-year interval, the one recourse to obtain a refund or credit score might be to file a refund go well with in a U.S. district courtroom or the U.S. Court docket of Federal Claims.
Taxpayers shouldn’t be penalized for the delays attributable to the pandemic or lack of ample IRS staffing to well timed deal with taxpayer responses to the disallowance of the refund declare. I sit up for persevering with engaged on this subject with the IRS and Appeals to guard taxpayer rights and decrease the executive burdens and hazards related to a declare disallowance.
