We finish this three-part discussion by discussing the final two IRS letters and notices cannot be ignored without serious adverse legal consequences for the taxpayer. The taxpayer must not ignore these two IRS letters and notices!
5. Statutory Notice of Disallowance of a Claim for Refund
Ignoring this notice is catastrophic if the taxpayer is interested in obtaining a tax refund. Even if the taxpayer does not intentionally ignore this notice, it is easy to lose track of the notice as the taxpayer winds his way through the administrative process.
If a claim for refund (such as a Form 1040X, Amended U.S. Individual Income Tax Return, Form 1120X, Amended U.S. Corporation Income Tax Return, or Form 843, Claim for Refund and Request for Abatement) is denied, the taxpayer has two years from the date of mailing (by certified or registered mail) by the IRS of such notice of disallowance to file suit in the district court or U.S. Court of Federal Claims.1 The two-year period begins to run on the date the IRS mails the taxpayer a notice of disallowance, whether or not the taxpayer actually receives the notice.2 The IRS and the taxpayer can use a Form 907 to extend the two-year period by mutual agreement.3 The period for bringing suit is not extended by resubmitting a rejected refund claim with new evidence.4 If the notice of disallowance is never issued, the two-year period under the I.R.C. never begins.
As a general rule, the taxpayer wants to file his refund suit as late as possible.5 This is so, because the taxpayer want to run out the assessment statute of limitations (three years or six years)6 to the extent possible to prevent the government from counterclaiming for additional taxes in the refund suit.
There is no statutory or regulatory provision requiring the IRS to act on a validly filed tax refund claim within any specific period of time. Thus, the IRS has great discretion in deciding whether or when to act on a claim. The IRS has the ability to pay the refund or conduct an examination of the claim or deny the refund claim or ignore the refund claim altogether. At the administrative level, the refund claim will initially be handled by a revenue agent at a local IRS office or an IRS Campus site. If the taxpayer is currently under examination for the tax year of the refund claim, the claim can be filed with the local revenue agent conducting the examination. If the taxpayer is unable to resolve the claim at this level, the taxpayer can receive a statutory notice of claim disallowance which will start the running of the two-year statute of limitations for bringing a tax refund suit. The taxpayer may then file a Protest requesting Appeals to reconsider a claim disallowed by the local examination office or the IRS Campus site, assuming that Appeals has not already considered the claim in some earlier context. A taxpayer must make this administrative request for a Protest within the period for bringing suit which is two years. The Appeals’ review of the claim disallowance involves the usual hazards of litigation considerations based upon the merits of the relevant issues.
Another alternative IRS action is that the taxpayer can receive a letter from the examination office “proposing” the disallowance of the refund claim noting that the taxpayer may file a Protest requesting Appeals to consider the refund, again assuming that Appeals has not already considered the claim in some earlier context. The problem with this proposed disallowance letter is that it is easily confused with a real notice of disallowance. A taxpayer must make this administrative request for Appeals consideration within 30 days of the date on the “proposed” disallowance. If the taxpayer fails to request Appeals consideration within 30 days, the taxpayer can receive a statutory notice of claim disallowance from the examination office which will start the running of the two-year statute of limitations for bringing a tax refund suit.
If the taxpayer files a Protest from an actual notice of claim disallowance, Appeals may refuse to reconsider a case if less than 120 days remains in the two-year period for filing suit. Reconsideration of the claim by Appeals does not extend the two year period in which suit may be filed. Appeals will not issue a second notice of claim disallowance when a claim is reconsidered.7 If Appeals erroneously issues a second notice of claim disallowance, it is doubtful that this second notice will reset the two year period. Thus, the two-year statute for filing a refund suit is unaffected by Appeals consideration. However, under section 6532(a)(2), the period of limitations for filing suit on a disallowed claim may be extended with the consent of the IRS in writing. The taxpayer, with the agreement of the IRS, may file for this extension on Form 907, Agreement to Extend the Time to Bring Suit.8 Keep a close eye on the 2 year statute for filing a refund suit. You do not want to find yourself in a position of having the statute expire during Appeals consideration barring the taxpayer from filing a refund suit if unsuccessful in settlement negotiations.
If the taxpayer files a Protest from a “proposed” notice of claim disallowance, and the taxpayer is unable to resolve the claim at Appeals, Appeals can issue the statutory notice of claim disallowance which will start the running of the two-year statute of limitations for bringing a tax refund suit.
Notice that the IRS “can” issue a notice of claim disallowance at various points of the administrative process described above, but the IRS might never issue a notice of claim disallowance. What then? In the absence of a notice of disallowance or a waiver by the taxpayer, there is no time limit for filing suit in the Code, although the catchall six year statute of limitations would likely apply.9
Thus, the taxpayer needs to keep track of the statute of limitations on filing a tax refund suit, because if he does not, he runs the chance of blowing the statute of limitations on filing the refund suit and thus will be forever barred from his tax refund.
6. Notice of Computational Adjustment
To achieve consistent treatment of all partners in the same partnership and to remove the substantial administrative burden occasioned by duplicative audits and litigation, Congress enacted coordinated procedures for determining the proper treatment of “partnership items” at the partnership level in a unified audit and judicial proceeding as part of The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).10 If a taxpayer is a partner is a partnership, the chances are the partnership is a TEFRA partnership. Unless the taxpayer is the Tax Matters Partner, it is likely that the taxpayer will not be involved in the TEFRA proceeding or in a settlement. Once a final partnership-level adjustment has been made to a partnership item in a TEFRA proceeding or in a settlement, a corresponding “computational adjustment” must be made to the tax liability of each partner.11 A computational adjustment is a change in the tax liability of a partner to properly reflect the conclusions of the TEFRA proceeding or settlement.12
If the IRS determines that the taxpayer’s individual return can be adjusted mathematically without the need for any factual determination at the partner level, an expedited procedure exists for assessment.13 Such computational adjustments are directly assessed against the partner.14 The notice of computational adjustment does not have to be sent by certified mail.15 According to the IRS a notice of computational adjustment can be made on a Form 4549A, “Notice of Income Tax Examination Changes.”16 However, there is no requirement that the notice of computational adjustment take any particular form, nor is there any requirement that the notice of computational adjustment be identified as such.
In a case where a partner receives a notice of computational adjustment and decides to challenge the IRS determination, the partner must pay the full amount of the assessment and file a claim for refund within six months of the date the IRS mails the notice of computational adjustment.17 If the taxpayer fails to pay the full amount of the assessment or fails to file a claim for refund all within six months of the date the IRS mails the notice of computational adjustment, the taxpayer is forever barred from filing a tax refund suit challenging the computational adjustment.
The big problem with the above procedures is that the taxpayer might receive some piece of paper from the IRS that qualifies as a statutory notice of computational adjustment and not recognize it as such. Even if the taxpayer recognizes the statutory notice of computational adjustment, the taxpayer must fully pay the tax within six months in order to sue for a refund.
When the taxpayer who is a partner in a TEFRA partnership starts receiving correspondence from the IRS relating to partnership adjustments the next move is imperative-get the correspondence to his tax professional without delay. Do this, even if the taxpayer thinks the tax professional is receiving copies of everything from the IRS. If the taxpayer doesn’t have a tax professional, get one.
For more information regarding this topic please contact Edward M. Robbins, Jr. –EdR@taxlitigator.com Mr. Robbins is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C. He is the former Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com .
1. I.R.C. § 6532 (a)(1).
2. Robert G. Rosser v. United States, 94-1 U.S.T.C. ¶ 50,002 (11th Cir. 1993). See IRS CCA 200203002, which concludes that the taxpayer could file a refund suit after the limitations period because of an inadequate notification letter from the IRS.
3. The IRS was precluded from pleading that the two-year period had expired, as it inadvertently led the taxpayer to believe that the deadline had been extended. Howard Bank v. United States, 759 F. Supp. 1073, 91-1 U.S.T.C. ¶ 60,053 (D.C. Vt. 1991).
4. L & H Co. v. United States, 963 F.2d 949, 92-1 U.S.T.C. ¶ 50,275 (6th Cir. 1992).
5. This does not mean you file on the last day of your statutory period. NEVER plan on filing on the last day of a statute of limitations, for obvious reasons.
6. I.R.C. § 6501(a) and (e).
7. IRM 126.96.36.199 (Reconsideration of Disallowed Claims in General) (02-01-2007).
8. IRM 188.8.131.52.3 (Extension of Period of Limitations for Filing Suit—Form 907) (06-01-2002).
9. Even if the IRS fails to issue a notice of claim disallowance, it is doubtful that the statute of limitations on filing a refund suit would remain open forever. In general, every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues. 28 U.S.C. § 2401(a). 28 U.S.C. § 2401(a) is the catchall statute of limitations provision and applies to all civil actions against the government. Nesovic v. United States, 71 F.3d 776, 777 (9th Cir. 1995). The statute of limitations under 28 U.S.C. § 2401(a) “was intended to place an outside limit on a suit against the United States.” Finkelstein v. United States, 943 F. Supp. 425, 431 (D.N.J. 1996). In deciding cases regarding when the statutory period in 28 U.S.C. § 2401 begins to run, the court must determine when “the right of action first accrued.” Such a claim accrues when all events have occurred to fix the Government’s alleged liability, entitling the claimant to demand payment and sue for his money. See Gerstein v. United States, 56 Fed. Cl. 630 (Fed. Cl. 2003) (analogizing 28 U.S.C. § 2501 to § 2401). As applied in the context of a tax refund suit, this catchall statute of limitations would likely give a taxpayer six years from the filing of the claim for refund to file a refund suit, if the IRS never issued a notice of claim disallowance.
10. See I.R.C. §§ 6221-6233; H.R. Conf. Rep. No. 97-760, at 599-600 (1982), reprinted in 1982 U.S.C.C.A.N. 1190, 1371-72; Callaway v. Commissioner, 231 F.3d 106, 107-08 (2nd Cir. 2000).
11. I.R.C. §§ 6201, 6230(a)(1).
12. I.R.C. § 6231(a)(6).
13. I.R.C. § 6230(a).
14. I.R.C. § 6230(a)(1).
15. See I.R.C. § 6230(c)(2)(A).
16. Internal Revenue Manual 184.108.40.206.9.7; IRS Chief Counsel Notice CC-2009-027, 2009 WL 2853841; IRS Chief Counsel Advice CC-2010030109160941, 2010 WL 1257375.
17. See I.R.C. §§ 6230(c)(1), (2)(A); Getzelman v. United States, No. CV 08-07005 (C.D. Cal., Dec. 9, 2009, Dkt. No. 39, at pp. 2, 5-6) (dismissing refund case for lack of subject matter jurisdiction where plaintiff failed to file administrative refund claim within six months after receiving notice of computational adjustments on Form 4549A).