Million-dollar refunds: a closer look at Joint Committee review.

Taxpayers awaiting large refunds from the IRS sometimes hear that delays in obtaining these refunds are attributable to "Joint Committee review." These review procedures are not highly publicized, and may raise questions on the part of some taxpayers whose dollars are at stake.

For starters, what is the "Joint Committee"? As a formal matter, the Joint Committee on Taxation (JCT) consists of senior members (majority and minority) of the congressional tax-writing panels--the House Ways and Means and Senate Finance Committees. The JCT operates through a nonpartisan staff of tax attorneys, accountants, economists and revenue estimators, who provide analysis and assistance to Congress on tax policy and technical issues, help draft revenue-related legislation and issue the official revenue estimates for tax legislation. JCT staff also have statutory responsibility for reviewing large IRS tax refunds.

What Types of Refunds Are Subject to JCT Review?

Sec. 6405 (a) provides that no refund or credit of income, estate, gift or certain other types of tax in excess of $1 million generally will be made until after the expiration of 30 days from the date a report is submitted to the JCT. The review threshold was raised to $1 million from $200,000 in 1990.

Certain types of refunds are not subject to JCT review, including:

* A refund or credit of estimated or withheld income tax, regardless of amount, that is made without first examining the return.

* A refund or credit of an amount on a tentative return in excess of the tax liability reported by the taxpayer on a final return.

* A case involving an overassessment, rather than an overpayment, in excess of $1 million.

* An abatement (see Sec. 6404) of an unpaid assessment, regardless of amount.

* A refund or credit of an unassessed advance payment or deposit.

* An overpayment determined by the Tax Court, or any other court of competent jurisdiction, as the result of the trial of the case (rather than a stipulated settlement).

A report to the JCT also is required in the case of certain tentative ("quickie") refunds resulting from net operating loss (NOL), capital loss and credit carrybacks (Sec. 6405 (b)). In these cases, however, JCT review does not occur when the refund initially is made; instead, it takes place when the IRS has completed its examination and determined that the correct amount of the refund is in excess of the $1 million threshold. A special rule applies for refunds attributable to certain disaster losses (Sec. 6405 (c)).

How Is the Threshold Computed?

The $1 million threshold is determined on a taxpayer-by-taxpayer basis. Overpayments proposed in other related cases are not factored into the computation. If multiple tax years are involved, overpayments of the same type of tax for all years are combined when it is reasonable to do so, and deficiencies and overpayments for the same taxpayer and the same type of tax are offset against each other. Refunds subject to review under Sec. 6405 (a), (b) and (c) are not aggregated for purposes of determining whether the $1 million threshold has been exceeded.

What Role Does the Service Play in the Process?

When JCT review is required, an agreed examination case generally will take longer than usual to process; the examiner must prepare a report for the JCT, and the report must be reviewed by another IRS employee, known as a Joint Committee Coordinator. The report generally includes a general introduction, including a tabulation of deficiencies, refunds and credits; relevant corporate history; a narrative statement of the reason for the refund; prior examination history; current examination activity; and an explanation of adjustments made by the Service to the taxpayer's tax liability. The IRS internal procedures and preparation of the report can result in delaying the refund.

IRS examination of the refund year may be extended to include other related tax years. For example, if a case is under examination and the taxpayer files a claim for refund (e.g., Form 1120X, Amended U.S. Corporation Income Tax Return) due to an NOL in a later tax year, and the aggregate amount of the refund exceeds $1 million, the examination will be extended to the loss year.

On concluding the examination, the agent will solicit the taxpayer's agreement to the findings on Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment. In cases involving both overpayment and underpayment years, Form 870 may be modified at the taxpayer's option to provide that the overpayments and underpayments will be netted, thus resulting in interest savings to the taxpayer. Absent the use of a qualified Form 870, the underpayments in tax agreed to by the taxpayer will be assessed--and the taxpayer billed--before the case is referred to the JCT.