Note; On April 2, 2019 the Second Circuit reversed the Tax Court in this case. See Second Circuit Reverses Tax Court, Removing "Black Hole" for Claiming Refunds.

Taxpayers who fail to timely their tax returns will sometimes tell advisers that it doesn’t matter because they are sure they are overpaid.  That’s fine—except that any overpayment can be lost if the taxpayer waits too long to timely file the return.

In the case of Borenstein v. Commissioner, 149 TC No. 10, the taxpayer discovered a way to lose a refund that probably will be new to most readers.

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In Chief Counsel Advice 201719026 the IRS looked at what happens to taxpayers who, under terms of the Offshore Voluntary Disclosure Program (OVDP), find that there is a refund due on one of the prior year returns filed under the program.  The key question was whether any such refund could be offset against other taxes due or refunded to the taxpayer.

The OVDP program was created in 2009 to allow a method for taxpayers with previously undisclosed foreign bank accounts to come into compliance voluntarily.  Under the terms of the program a taxpayer must disclose all such offshore accounts and file original or amended returns reporting the income for the most recent eight years of returns whose due date has passed.  The taxpayer also gives consent for the IRS to assess tax for all those years as part of the program regardless of whether the period for assessment generally under IRC §6501 has run.

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The limited reach of the financial disability tolling provisions added by Congress to §6501 was again highlighted in the case of McAllister v. United States, US Court of Federal Claims, No. 1:13-cv-01026.

IRC §6511(h) provides an exception to the general statute of limitations provisions under §6511 for filing a claim for refund in cases of financial disability.  In April of 2015 the IRS, in Chief Counsel Memorandum 201515019 (which we discussed in an article posted back in April of 2015), concluded that the provision did not extend the general rule for when a taxpayer must file a claim for refund from years losses are carried to from a “financial disability” year.

Advisers at times treat the statute of limitations related to tax returns as being broader than it actually is, believing that once a year is closed there is no ability for either the IRS or a taxpayer to make a change to an item on that return.  As PLR 201548006 points out, that’s not the case.  And, in this case, that works out to the taxpayer’s advantage.

In Chief Counsel Advice 201545017 the IRS looked at whether an amended return was timely filed where an attempt was made to file it electronically prior to the expiration of the statute, the return was rejected and then a paper return was filed without contacting the e-Help desk to make a waiver request to file on paper. 

In Chief Counsel Advice 201540012 the IRS held that a corporation had not made a proper informal refund claim and thus the statute of limitations had expired.

The situation involved a dispute between a corporation and the taxing agency of a foreign government. The IRS, referring to years by “Y” and numbers indicated that the questions involved years Y1, Y2 and Y3.  In year Y12 the corporation settled the dispute with the foreign government.

Dealing with the interaction of various statute of limitation rules can be complex that it appears at first and, in the situation described in Chief Counsel Advice 201517005, the IRS concluded that the taxpayer could not take full advantage of amending a return to change from claiming a foreign tax credit to claiming a deduction for foreign tax paid when that change to the prior return created a net operating loss required to be carried back.