In Chief Counsel Email 201526007 the IRS addressed the issue of whether the IRS retained the right to supplement or amend a refund claim due to the fact that a credit from that claim is remains available for use in the taxpayer’s account.
While emails generally only give us one side of the conversation (and thus often omit significant facts), it appears an IRS employee was wondering about the ability to supplement or amend a prior protective refund claim on which the IRS had acted by allowing a claim and then crediting it to the taxpayer’s account to be used for future taxes. Thus a change in the allowed claim would flow directly to the balance that was available to be applied against the taxpayer’s tax liability in a period that was still open.
Where there is an issue regarding the effect of things such a net operating loss carryover, the fact that the loss being carried into the current year may arise from a year that is now “closed” does not prohibit the IRS (or the taxpayer for that matter) from making adjustments to that prior year and adjusting a return or returns for years that remain open for assessment (for a recent example, see the case of Boring v. Commissioner, TC Summary 2014-105).
So, the question arises, does that ability to “reach back” into the past extend to being able to adjust a credit of a refund to future periods where the change to that prior period was change the amount of the credit available for the current year’s tax.
The answer is no. In this case the issue is not a deduction that will go onto the current year’s return, but rather an amount that remains in the account as a credit. Changing that would amount to, effectively, assessing additional tax for the prior year or allowing an additional claim for refund—and that (rather than locking down deductions or income) is what the statute of limitations applies to.
The memo notes specifically:
A timely filed protective refund claim may be supplemented or amended up until the point at which final action is taken on that claim. Final action can be allowance as well as disallowance of a claim. See FSA 200121008 and IRS CCA 200547011, and cases cited therein. Once a claim is allowed in full or disallowed, there is no longer a claim in existence to amend or supplement.
Allowance of the claim can be via refund paid to a taxpayer or by credit applied to another tax liability; the relevant IRC provisions applicable to refunds use the terms refund and credit interchangeably. Under section 6402(a), upon determination of an overpayment, the Service may either apply it to a tax liability or refund it to the taxpayer. The taxpayer may also elect to carry a credit forward to apply to estimated taxes. See also sections 6511(b)(1); 7422(a).
The memo concludes:
If a claim has been allowed in full, final action has been taken on the claim and there is no longer an existing claim which can be supplemented or amended. The fact that the claim may have been allowed via credit rather than a check paid to the taxpayer does not make a difference; this was still final action taken with respect to the refund claim for the particular periods and that refund claim ceases to exist. The determination of the overpayment amount establishing the credit amount to be carried forward would be final action on those refund claims. There is no authority for the position that an overpayment credit remaining in a taxpayer’s account, because it was carried forward from an overpayment determined in an earlier year, somehow keeps a refund claim for that earlier year pending. The refund claim for the earlier year would be closed and there is no authority for the Service to go back and redetermine the amount of that overpayment.
While the memo deals with the IRS’s rights, similar rights and limitations would apply to the taxpayer as well. That is, a taxpayer cannot “save” what would otherwise be a lost refund due to the statute of limitations by pointing out the taxpayer had asked for any overpayment to be refunded on the original return, thus meaning any refund due would have been credited to what might be a year still open for claiming refunds.