The National Taxpayer Advocate wrote a blog post last month highlighting a potential trap for the unwary who receive a notice of claim disallowance and think that they have worked out or are working out a resolution. In oversized bolded letters, she stated:
If you are working with the IRS or the IRS Independent Office of Appeals (“Appeals”), do not make the mistake and assume that working toward a resolution equates to the IRS’s ability to pay a refund or allow a credit once the IRC § 6532 statute has expired.
The NTA made this statement because IRC 6514(a)(2) “prohibits the IRS from paying the refund or allowing the credit” if more than two years has passed from the notice of claim disallowance. In order to preserve the right to obtain payment beyond the two-year period, the taxpayer must either file suit or ensure that they and an authorized IRS employee sign a Form 907, Agreement to Extend the Time to Bring Suit.
The NTA felt it necessary to write the post highlighting this issue because of the significant and unusual delays the pandemic has caused. Taxpayers might think they have worked something out with the IRS to resolve an issue after the notice of claim disallowance, but unless the IRS actually takes action within the two years to pay the refund or allow the credit, the taxpayer can lose out. In the current climate, matters can take more than two years to resolve.
The advocate lays out the problem in stark terms as she describes the administrative process of contesting a claims disallowance letter:
Once the notice of claim disallowance is received, a taxpayer needs to send a protest to the issuing office contesting the disallowance. This assumes the taxpayer understands the notice and the requirements, as these notices are not always clear. (See the National Taxpayer Advocate 2014 Annual Report to Congress, Refund Disallowance Notices Do Not Provide Adequate Explanations.) With the delays in processing correspondence, these protests may sit for many, many months before being addressed. Once assigned, the IRS employee assigned to the case needs to obtain the administrative file, bundle it with the taxpayer’s protest, and send it to Appeals for consideration. Unfortunately, the backlog adds more delays to this process. Once a protest is assigned to Appeals, it still needs to be assigned to an Appeals Officer and worked, which could be an additional six to 12 months. If the issue involves whether the claim was timely, and the Appeals Officer concludes that it was, the case may be transferred back to Exam for a determination on the merits of the refund claim. If the IRS and the taxpayer do not agree on the merits, the taxpayer can file another protest with Appeals to contest the merits of the underlying claim and the process starts all over. It is not surprising that this process may take over two years to be resolved, exceeding the two-year period in which a refund could have been issued (or a credit allowed).
While the Form 907 extension exists to remove the pressure of the two-year time period in this circumstance, executing that form may not always solve the problem. The blog also points out that representatives must ensure that their power of attorney designates the Form 907 as an act within their scope of representation. Of course, the IRS must agree to the Form 907. A taxpayer cannot unilaterally execute a binding extension agreement. Look to IRM 184.108.40.206.3(1) to find the reasons that will cause the IRS to agree to extend the time.
The NTA also points out that sometimes no one at the IRS has the case under assignment. In that situation the taxpayer will struggle to find someone at the IRS willing and authorized to sign Form 907. For this reason, the NTA suggests starting the process of getting the Form 907 filed 4-6 months before the running of the two-year period.
If a taxpayer cannot obtain the necessary signature as the two-year period approaches, filing a refund suit may provide the taxpayer’s only option. The NTA states the IRS could extend the time period by exercising its authority under IRC 7508 as it has done for several pandemic-related matters; however, it has not done so for the two-year period for refund.
Be aware that filing a refund suit has slightly different timing rules than the filing of a petition in Tax Court. The timely mailing is timely filing rule of IRC 7502 does not apply. Carl discussed this in a post a few years ago. A recent unpublished opinion of the Federal Circuit also addresses this issue. In Weston v. United States, No. 22-1179 (Fed Cir. 2022), an unpublished opinion [appearing in Tax Notes Federal on April 14, 2022], the Fed. Circuit affirmed the dismissal of a pro se complaint for Lack of Jurisdiction for late filing under the 2-year rule of 6532(a). No new law was made, and there was no way the taxpayer could have won her case under 6511, anyway. The taxpayer filed joint 2012 and 2013 returns with her deceased husband in mid-2017 – more than 3 years late. The returns showed overpayments. The claims were timely under 6511(a) (filed on the same day as the returns), but would be limited to zero under 6511(b)(2)(A). The IRS sent her notifications of claim disallowance on April 4, 2018 (for 2013) and April 11, 2018 (for 2012). She mailed a complaint to the Court of Federal Claims on April 11, 2020, which arrived at the CFC and was filed on April 20, 2020. Of course, the 2013 disallowance 2-year period ran before she mailed. But, she argued for timely filing for the 2012 year because of timely mailing of the complaint. She lost because 7502 applies to filings with the IRS and the Tax Court, but not with any other court.
The NTA’s post provides a good reminder of yet another hurdle created by the pandemic. Don’t let this hurdle prevent your client from obtaining a refund.