What You Need to Know to Protect Your Client’s Refund and Appeal Rights
It is your responsibility as a tax professional to ensure you protect your client’s right to claim a tax refund. Tax professionals must be vigilant in tracking deadlines and advising their clients to take timely actions.
Time for Filing a Claim for Refund
The Refund Statute Expiration Date (RSED) is the end of the period in which a taxpayer can make a claim with IRS for a credit or refund for a specific tax year. If a taxpayer doesn’t make a claim before the RSED expires, then they may no longer be entitled to a credit or refund.
A taxpayer must file a claim within three years of the date the return was filed or within two years from the date the tax was paid whichever is later.
However, the amount of credit or refund is limited to the tax paid (which includes tax, penalties, and interest) during the three-year period prior to the filing of the claim, plus any extension of time to file. If the taxpayer doesn’t file a claim for credit or refund within the three-year period, the amount is limited to the portion of tax paid (the payment of tax could be for tax, penalty, or interest) within the two-year period immediately preceding the filing of the claim.
When Payments are Considered Paid
It’s crucial to know when your client’s payments or credits are considered paid to determine if a claim for refund can be filed. Payments are generally amounts to satisfy tax liabilities on an original or amended return. Credits are generally amounts allowed on a return to reduce the original or additional tax liability.
A payment submitted with a timely tax return (not including extensions) is considered paid on the due date of the original return;
A payment made with a request for an extension of time to file is treated as an estimated tax payment (see prepaid credits below);
Overpayments, including interest allowed on the credit by the IRS, credited to another tax period or type of tax constitutes a payment on the date the credit is allowed;
Offsets to another tax period use the cycle date of the offset, not the transaction date of the offset; and
Subsequent payments are considered paid on the transaction date.
Prepaid credits considered paid on the original due date of the return include:
Federal Income Tax Withheld;
Estimated tax payments;
Federal Tax Deposits;
Earned Income Tax Credit;
Generated refundable credit allowances (e., Additional Child Tax Credit); and
Premium Tax Credit.
The RSED for credits on late returns filed after an Automated Substitute for Return (ASFR) or Substitute for Return (SFR) doesn’t follow the general two-year rule. Generally, the amount to be credited or refunded is limited to the tax paid during the three years immediately preceding the filing of a claim, plus the period of any extension of time to file. Therefore, even if prepaid credits are barred, available credits paid within three years of the received date of ASFR returns and SFR reconsiderations are not barred. Visit When you can claim a refund or credit and Don’t Lose Your Refund by Not Filing for more information.
Claim Disallowance Notice
If the IRS fully or partially disallows a taxpayer’s claim for refund, they will receive a claim disallowance notice. The notice of claim disallowance, usually a letter 105C or 106C, is a taxpayer’s legal notice that the IRS is not allowing the credit or refund they claimed.
Appeal Rights When the IRS Disallows a Refund Claim
If your client receives a claim disallowance letter (see claim disallowance notices below) and they disagree with the IRS’s determination, they have two years from the date the IRS mails the notice of claim disallowance to request the IRS to reconsider the claim, request an appeal, or file suit in the U.S. District Court or the U.S. Court of Federal Claims. This two-year period is not extended while the IRS is reconsidering the claim or while your claim is in the Independent Office of Appeals (Appeals).
If the IRS issues a refund after the two-year period for filing suit expires, it is considered erroneous and subject to repayment unless the taxpayer filed a timely suit or extended the statute by filing an IRS Form 907, Agreement to Extend the Time to Bring Suit), which needs to be signed by both the taxpayer and the IRS. The IRS won’t inform you when this period is about to expire; therefore, it is up to you and your client to keep track of this deadline to protect the refund.
Appealing a Claim Disallowance Notice
The Taxpayer Bill of Rights applies to all taxpayers in their dealings with the IRS. One of those rights is the Right to Appeal an IRS Decision in an Independent Forum.
If your client disagrees with an IRS decision to disallow the claim, they can submit an appeal request by mailing it in writing, or electronically if available, to the office that sent them the letter with their appeal rights. For information on filing a formal written protest or a small case request, taxpayers should review Publication 5, Your Appeal Rights and How To Prepare a Protest If You Disagree.
The IRS office that receives the request will consider the taxpayer’s request and attempt to resolve the disputed tax issues. If that office can’t resolve the taxpayer’s issues, they will forward the case to Appeals for consideration. Appeals officers review cases that taxpayers submit, meet with the taxpayer informally, and consider the taxpayer’s position and the IRS’s position in a fair and unbiased manner.
If the taxpayer sends new information or documents to Appeals, the Appeals officer may need to return the case to the original IRS office that issued the claim disallowance for them to review the new information.
Links to resources:
Refund Statute Expiration Date (RSED) – Taxpayer Advocate Service (irs.gov)
Filing Past Due Tax Returns Before the Refund Statute Date Expires – TAS (irs.gov)
Notice of Claim Disallowance: Don’t Make This Mistake – TAS (irs.gov)
Pub. 556, Examination of Returns, Appeal Rights, and Claims for Refund
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