Accounting 432/732 Outline—Chapter 1
Overpayments, Refund Claims and Refund Litigation
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- Navigate this page:
- § 8.03 Refund Suits and Overpayment Suits
- § 8.04 Statutes of Limitations on Refund Claims
- Chapter 9 Reliance on Treasury Regulations and IRS Positions Omit pages 431-462 § 9.04 Obtaining Private Guidance for a Taxpayer
- Chapter 10 Civil Tax Penalties
- § 10.02 Specific Civil Penalties and Defenses of Those Penalties
- Note that the statements are normally to be provided to the payee by January 31
- § 10.03 Assessment, Abatement and Suspension of Penalties
Overpayments, Refund Claims and Refund LitigationOmit Rosenman v U.S. 3323 US 658 (SC 1945), (pp 382—387), Lewis v. Reynolds 284 US 281 (SC 1932), (pp. 387-88), Decker v. US 93-2 USTC ¶ 50,408 (DC Conn, 1993), (pp. 390-394), Night Hawk Leasing v. U.S. 84 Ct. Cl.. 596 (Ct. Cl , 1937) (pp 394-396), Flora v. US 362 US 145 (SC 1960), (pp 396-403) Omit pp 405 (bottom of page) to 427. § 8.02 Refund Claims ` Overpayments of Tax No definition but § 6401(a) provides that an overpayment includes payment of any internal revenue tax that is assessed or collected after the applicable statute of limitations has expired. In addition under § 6401(b) refundable credits that exceed the amount of income tax imposed for the year are considered overpayments of tax. Excessive withholding tax and estimated tax payments are therefore treated as overpayments. § 6401 (c) provides that an amount paid as tax may constitute an overpayment even if there is no tax liability for which the tax was paid. In Liberty Glass 322 US 524 (1947) the Supreme Court described it as follows: “Whatever the reason the payment of more than is rightfully due is what characterizes an overpayment. Which Remittances are “Payments”? Some remittances are deposits that do not become payments until some time later, if ever. A deposit is refundable to the taxpayer at any time but a payment is not. Because both payments and deposits suspend further interest accruals, the taxpayer may not initially make clear to the IRS, which he intended his remittance to be. For statute of limitations purposes, however, the day of “payment” is key. As a result many cases distinguishing between payments and deposits arise in the context of statute of limitations on refund claims. Revenue Procedure 84-58 provides guidance concerning whether a remittance would be treated as a payment or a deposit and how the IRS would treat an undesignated remittance. The primary purpose of the Revenue Procedure is to inform taxpayers how to make remittances that stop the running of interest on deficiencies. Page 385 describes in detail situations in which a remittance would be treated as a payment or a deposit. Note that a deposit in the nature of a cash bond is not a payment of tax is not subject to claim for credit or refund and if returned to the taxpayer does not bear interest. Do Problem 8-2, Part B Revenue Ruling 85-87 states that although the IRS cannot assess an amount sent in after the statute of limitations has expired the IRS does not have to return to the taxpayer a remittance made while the statute of limitations was still open. Submission and Timing of the Refund Claim A refund claim invites the IRS to examine the return that is the subject of the claim,. Thus it is wise to review the underlying return before filing the claim and if the statute of limitations on assessment remains open consider carefully the risks and relative merits of possible claims before deciding whether to seek a refund. Review § 29 Tight Sands Case Content of the Refund Claim A claim for refund for overpayment may be made on the initial return for the year, an amended return, or a special form provided by the IRS. If an income tax return has already been filed, the claim must be submitted on the amended return appropriate for the particular type of taxpayer. Review Forms 1040X, 1120X & 843. (Review key parts on pages 389 & 390) Note that client may in some instances file a return with incomplete information and then file an amended return when more accurate information is available. Do Problem 8-7 Informal Claims for Refund Following an audit, if the IRS determines that the taxpayer made an overpayment, Form 870 will serve as a refund claim. A document can be treated as an informal refund claim if, as a factual matter, the following are true: (1) the court determines that an informal claim was filed; (2) the claim was in writing or has a written component and (3) the matters set forth in writing are sufficient to apprise the IRS that a refund is sought and to focus the IRS’s attention on the merits of the dispute so that the IRS may commence an examination of the claim is it so desires. § 8.03 Refund Suits and Overpayment Suits Refund Suits A refund suit must be based on the same grounds as those stated in the refund claim. Refund suits have another jurisdictional prerequisite: “full payment” of the tax., including interest and penalties if they were part of the assessment and part of the litigation issue. In general a claim for refund or credit of an overpayment is timely if it is filed within three years from the date the return was filed or within two years from when the claimed tax was paid whichever is later. Do Problem 8-1 Part E ii Overpayment Litigation in Tax Court Tax Court subject matter jurisdiction requires a notice of deficiency and timely responsive petition. Therefore, to pursue in Tax Court a refund of an overpayment, a taxpayer must have received a notice of deficiency and petitioned the court. When that occur the Tax Court has jurisdiction to find an overpayment and jurisdiction to enforce payment by the IRS. A claim for refund with the IRS is not required in order to pursue overpayment litigation in Tax Court. Do 8-2 Parts A & C § 8.04 Statutes of Limitations on Refund Claims Overview §6511(a) In general a claim for refund or credit of an overpayment is timely if it is filed within three years from the date the return was filed or within two years of when the claimed tax was paid, whichever was later. If no return was filed the statutory period is two years from when the tax was paid. Review US Marine Corp. example. Because late-mailed returns or claims are not filed until actually received, it is important to determine, when filing a refund claim, if it was timely mailed. When calculating the time periods under § 6511 it is helpful to know that an early return is deemed filed on the due date of the return. Similarly any portion of tax or withholding paid before the last day prescribed is deemed paid on the last day. Problem 8-1 (parts A-D), Problem 8-5 Chapter 9 Reliance on Treasury Regulations and IRS Positions Omit pages 431-462 § 9.04 Obtaining Private Guidance for a Taxpayer Reporting Requirements Revenue Procedure 2002-1 If the taxpayer obtains a letter ruling from the National Office, he must attach the letter ruling to his tax return for the year in question. A return submitted with an attached letter ruling may cause the IRS to take a closer than normal look at the return in order to confirm whether (1) the return properly reflects the conclusions stated in the ruling; (2) the representations upon which the letter ruling was based reflected an accurate statement of the material facts; (3) the transaction was carried out substantially as proposed and (4) there has been no change in the law that applies to the period during which the transaction or continuing series of transactions was consummated. Although the IRS is not legally bound by a letter ruling its long-standing policy has been to honor a ruling issued directly to a taxpayer. Unless it is accompanied by a closing agreement, however, the IRS may revoke or modify a letter ruling following (1) the enactment of legislation or ratification of a tax treaty; (2) a decision of the United States Supreme Court; (3) the issuance of temporary or final regulations or (4) the issuance of revenue ruling, procedure, notice or other statement published in the Internal Revenue Bulletin. Areas in Which the IRS will not Issue Letter Rulings The IRS’s authority to decline a letter-ruling request is, for the most part, discretionary. The stated policy of the IRS is to issue letter rulings only with respect to completed transactions for a year in which the taxpayer has yet to file a return and for prospective transactions that have not been consummated. Probably the most important fields in which the IRS will issue prospective rulings related to the tax effects of corporate reorganizations and liquidations. Review A vs F Reorganization case. No letter ruling, considerable controversy. There are certain topics on which the IRS had made it clear that it will not issue letter rulings. Third revenue procedure of the year lists these. See page 404. The revenue procedure also list specific no rule areas including: §§ 121, 162, 269, 274, 312, 351, 368(a)(1)(A) Situations in which the IRS ordinarily will not issue a letter ruling include:
How to Request a Letter Ruling or Determination Letter A letter ruling is a written statement issued to a taxpayer by the National Office of the IRS that interprets and applies the tax laws to a specific set of facts described in the letter ruling. A determination letter applies the principles and precedents previously announced by the National Office to a specific set of facts. While similar to a PLR a determination letter is issued by a local IRS official, rather than the National Office, and normally covers a completed transaction, rather than a proposed transaction. Determination letters most often related to the qualification of an employee benefit plan as an exempt entity under § 401 or tax-exempt entities under 501. No determination letters on novel issues or where doubt exists concerning the application of precedent. Review Form 1023 Request for Determination of Tax Exempt Status Do Problem 9-5 To request a letter ruling or determination letter the taxpayer or his authorized representative must submit to the IRS a request containing specific information. The first Revenue Procedure of each year describes the letter ruling process, including what information must be included in the request and further guidance on when the IRS will or will not issue a ruling. Note that the cost of obtaining a revenue ruling can be substantial. $10,000 and up. Review the condominium association example Do Problem 9-4 Review the highlights of Section 8 of Revenue Procedure 2002-1 (pages 467-71) and Sample Ruling Requested (pp. 472-475) Requesting a Conference with the IRS When pursuing a letter ruling request a taxpayer is generally entitled to a conference at the National Office as a matter of right. If the taxpayer requests a conference the IRS will notify the taxpayer of the time and place of the conference which must be within 21 calendar days. The conference of right affords both the IRS representative and the taxpayer an opportunity to clarify the issues involved and to request and respond to additional factual information or representations. A taxpayer may request that his conference of right be held by telephone and the IRS will decide if the request is appropriate. If an adverse holding is proposed, the IRS may offer the taxpayer additional conferences if the IRS feels they are helpful. If the taxpayer’s representative is well prepared, these conferences can significantly increase the chances of a favorable ruling. Occasionally the IRS will hold a conference before the taxpayer submits the letter-ruling request in order to discuss substantive or procedural issues relating to a proposed transaction. The taxpayer can use the pre-submission conference to gauge the likelihood that an adverse ruling may be issued. Whether to Request a Letter Ruling and Whether to Withdraw a Ruling Request One of the most important factors bearing on whether the taxpayer should request a letter ruling is the likelihood of obtaining a favorable result. Any flaws in the taxpayer’s position, whether factual or legal, are much more likely to be discovered as part of the ruling application process as compared to a routine examination of the taxpayer’s return. When the taxpayer wishes to proceed with a transaction regardless of whether or not the tax consequences are favorable, a letter-ruling request can present a serious risk. In addition to the risks associated with an adverse determination, the taxpayer should be advised of the costs related to the ruling process. These costs include not only the user fees imposed by the IRS, but also the representative’s billable time necessary to prepare and negotiate the request. A final consideration relates to time involved in obtaining a letter ruling. In some cases the transaction cannot wait for a favorable ruling and must be consummated even though a ruling might lend the parties important peace of mind. Although no general rule exists, the estimated waiting period for a letter ruling in the income tax area is eight to twelve weeks. As the complexity of the issue and the potential tax liability involved increase, so generally does the waiting period. Chapter 10 Civil Tax Penalties Omit Coleman TCM 90-511 (pp 493-496, Osteen 62 F3d 356 (CA-11, 1995) (pp 498-501) Heasley 902 F2d 380 (CA-5 1990) (pp 504-508), Meier 91 TC 273 (1988) (pp. 514-517) § 10.01 Introduction: The Role of Penalties IRM Part XX—The Service uses penalties to encourage voluntary compliance by: (1) helping taxpayers understand that compliant conduct is appropriate and non-compliant conduct is not; (2) deterring noncompliance by imposing costs on it; and (3) establishing the fairness of the tax system by justly penalizing the non-compliant taxpayer. In 1989 Congress streamlined the tax penalty system, but even today the Code contains over 150 civil tax penalties. This chapter focuses on taxpayer-related penalties—those imposed upon taxpayers for understatements of tax and delinquent filing or payment, These taxpayer-related penalties represent the type most frequently assessed by the IRS and most frequently litigated by taxpayers. § 10.02 Specific Civil Penalties and Defenses of Those Penalties § 6651(a)(1) The Failure to File Penalty—the late filing penalty equals five percent of the amount of tax required to be shown on the return for each month (or fraction of a month) during which the failure to file continues, up to a maximum of 25 percent. If the taxpayer’s failure to file is fraudulent the penalty rate increases to 15 percent per month up to a maximum of 75 percent. The penalty period commences the first day after the return is due (taking into account extensions of time to file) and ends once the taxpayer mails the return. The late filing penalty is computed based on the net amount of tax required to be shown on the return. For this purpose the liability shown on the return is reduced by tax prepayments, estimated tax payments, and allowable credits (including the wage withholding credit under § 31). § 6651(a)(2) The Failure to Pay Penalty—Failure to timely pay triggers the late payment portion of the delinquency penalty. The late payment penalty starts at .5 percent for the first month during which the tax remains unpaid and increasing an additional .5 percent for each month (or fraction thereof) during which the tax remains outstanding up to a maximum of 25 percent. The penalty stops accruing on the date the IRS receives payment. The late payment penalty may also be triggered by the taxpayers’ failure to timely pay an assessed deficiency. For deficiencies of less than $100,000 the taxpayer is given 21 calendar days after notice and demand is made to pay. If the amount demanded is $ 100,000 or more, the allotted time period drops to ten business days after the date of notice and demand. The penalty is calculated on the net amount due. If both the late filing and late payment penalties apply, the taxpayer may offset the late payment portion of the penalty against the late filing portion. Note that the 25 percent maximum rate applicable to each of the late filing and late payment additions applies separately. As a result the late payment penalty may continue to accrue beyond the 5-month period after which the late filing penalty reaches its maximum. The number of months during which the late payment penalty accrues is determined by taking into account extensions of time to pay. Recall that an extension of time to file a return does not extent the date prescribed for payment. Do Problem 10-1 The Reasonable Cause Defense Under Reg. 301.6651-1(c) neither the late filing nor late payment addition applies if the delinquency is due to reasonable cause and not willful neglect. Often the issue relates to taxpayer’s reliance upon professional advice. US. V Boyle 469 US 241 (SC 1985) In this case Supreme Court drew a distinction between reliance on an expert’s advice relating to a substantive matter of law and reliance on an expert’s advice relating to a procedural matter. What was the nature of this distinction? Did the Court uphold Boyle’s reasonable cause defense? Accuracy Related Penalties § 6662 imposes a single accuracy related penalty, accompanied by uniform definitions. The amount of the penalty equals 20 percent of the portion of the underpayment of tax attributable to one or more of five types of misconduct. The maximum accuracy related penalty that may be applied is 20% even if the underpayment is attributable to more than one type of misconduct. Note that if the taxpayer files the return after the prescribed due date, both the accuracy related penalty and the late filing penalty may apply to the same portion of a tax underpayment.
Sources of “substantial authority” include the Code, Treasury Regulations, court decisions, Revenue Rulings and Procedures, certain legislative history sources and private letter rulings. Substantial authority exists for the tax treatment of a particular item only if the weight of authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment. Do Problem10-2A, & 10-2B, Problem 10-4 Disclosure: For purposes of determining whether an understatement of tax is substantial, the amount of the understatement is also reduced by amounts attributable to an item if the relevant facts relating to the tax treatment are :”adequately disclosed: on the return or in a statement attached to the return and there is a :”reasonable basis” for the taxpayer’s tax treatment of the time. A taxpayer may use Form 8275, Disclosure Statement, to disclose a return position. Revenue Procedure 2001-11 (page 501-02) sets forth in more detail the circumstances under which disclosure on the return itself is considered adequate. Review Section 4. Insert Form 8275 here Return to § 29 Tight Sands example.
Under § 6662(b)(3), the 20 percent addition applies to an underpayment of tax attributable to a substantial valuation misstatement. The substantial valuation misstatement penalty applies most commonly to a taxpayer who in an attempt to inflate a charitable contribution deduction overstates the value of property or to a taxpayer who in an attempt to increase cost recovery deduction or reduce the amount of realized gain, overstates the adjusted bases of property reported on the return. In order to trigger the penalty the overstatement of value or basis must be at least 200 percent greater than the correct value or the correct adjusted basis, as the case may be, and the tax underpayment attributable to the valuation misstatement must exceed $5,000 ($10,000 in the case of a C corporation). If the value or adjusted basis of any property claimed on a return is 400 percent or more of the amount determined to be the correct valuation or adjusted basis, the penalty rate increases to 40 percent of the resulting underpayment.
The substantial valuation misstatement penalty applies to a § 482 valuation misstatement as well, a topic best discussed as part of an international tax course. Separate prongs of the accuracy-related penalty may also apply to an employer who attempts to inflate pension contribution deductions (§6662(b)(4)) or to a taxpayer who understates the value of property reported on a gift or estate tax return (§6662(b)(5)).
To qualify for the exception the taxpayer must establish that there was reasonable cause for the tax underpayment and that the taxpayer acted in good faith. Review the Consolidated Penalty Handbook (pp 508—513), which includes a summary of the pertinent facts and circumstances that the IRS will consider when deciding whether reasonable cause exists:
§6663 applies when the taxpayer’s behavior extends substantially beyond the failure to exercise reasonable care, and evidences an intentional effort to underpay his taxes. The increase penalty rate, 75 percent of the portion of an underpayment attributable to fraud, reflects the higher level of culpability that must exist in order to trigger the addition: The civil fraud penalty applies only if a tax return has been filed.
The IRP Program verifies whether a taxpayer’s income has been fully reported by digitally matching data on information returns filed by employers and other payers with the recipient’s income tax return. Failure by the taxpayer to include income reported on an information return normally results in the IRS sending the taxpayer a notice explaining the discrepancy and requesting payment of any resulting tax adjustment. Under current law information returns are required for numerous types of payments including wages (Form W-2, interest (Form 1099-INT), dividends (Form 1099-DIV), and broker transactions (Form 1099-B). In addition to reporting these amounts to the IRS, the payor must also send a copy of the return to the income recipient so that the recipient can accurately and timely complete his own return. (States such as California match this information as well). Review Farmington, NM case, Review CA pathologist case Under § 6721 a payor who fails to timely file an information return or to properly include all the required information on the return is subject to a penalty of $50 per return up to a maximum of $250,000 per calendar year. Do Problem 10-2C
§6722 provides a similar set of penalties to a payor’s failure to furnish a payee statement or to include in the payee statement all the correct information. The penalty equals $50 for each statement with respect to which the failure occurs, up to a maximum penalty amount of $100,000 per year. Note that the statements are normally to be provided to the payee by January 31. An exception for inconsequential errors applies to both penalties. Reporting penalties under §§ 6721 & 6722 may both be waived (§6724) if the filer shows that the failure was due to reasonable cause and that the filer acted in a responsible manner. Reasonable cause factors include: (1) significant mitigating factors for the failure, (2) failure arose from events beyond the filer’s control
Discussion of the $250 unrealistic position penalty and the $1,000 willful, reckless or intentional conduct penalties is similar to prior comments about preparer penalties. § 10.03 Assessment, Abatement and Suspension of Penalties Because the accuracy-related and civil fraud penalties hinge upon an underpayment of tax (which must be assessed as a deficiency) the penalties themselves must themselves also be included in the notice of deficiency and may be reviewed by the Tax Court before they can be formally assessed. Moreover the Appeals Division will consider the penalty addition at the same time it considers the underlying tax liability. However with respect to the delinquency penalty under § 6651 in most cases the IRS need only notify the taxpayer of a penalty assessment resulting from a failure to file or pay and make a demand for payment. After notice and demand the IRS may collect the resulting amount.. Neither the information reporting nor the preparer penalties are subject to the deficiency assessment procedures. Nevertheless the IRS has created a pre-assessment appeals procedure for preparer penalty cases that is similar to that followed in deficiency cases. The IRS has authority to waive or abate an asserted penalty under specified circumstances. The Code itself, for example, allows the return preparer penalty to be abated if it is later established as part of a final administrative determination or judicial proceeding that the return on which the penalty was based contained no understatement of the tax. The IRS has also established an administrative appeals procedure under which a taxpayer may request waiver of the penalty after it has already been assessed. The post-assessment appeals procedure applies to most penalties that may be waived based on a reasonable cause, due diligence, good conscience or other similar exception. Taxpayers most commonly utilize these appeals procedures to protest delinquency penalties. If the abatement request is denied the taxpayer can protest that denial with the Appeals division.
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