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Is your refund claim adequate?

Taxpayers filing refund claims need to consider numerous procedural matters. A recent case illustrates the importance of meeting all the technical requirements for a refund claim, and the unfortunate consequences that can result from failing to do so. In Angle, 996 F2d 252 (10th Cir. 1993), the court upheld a district court's dismissal of a taxpayer's refund suit for failure to comply with the jurisdictional prerequisite that a timely refund claim must have been filed. The taxpayer had previously filed timely refund claims (amended returns) in 1984 and 1986 as to the taxpayer's 1982 return. In 1989, the taxpayer filed a third amended return for 1982. The court determined that the 1989 amended return claimed relief on grounds different from those involved in either of the timely filed refund claims. Since the taxpayer's arguments for relief did not relate to the discovery of a mathematical error in the earlier claims, nor were they obviously and necessarily correct as a matter of law, the refund claims timely filed by the taxpayer in earlier years could not support new contentions made in a claim after the statute of limitations (SOL) had expired.

A taxpayer may not sue to recover taxes unless the taxpayer has first filed a timely refund claim. Additionally, a taxpayer may be precluded from arguing alternative grounds of recovery if the grounds are not included in a timely filed refund claim. While there are many technical requirements for a valid refund claim, this analysis discusses two of the least understood requirements--the doctrines of sufficiency and variance.

Sufficient facts for claim

Under Regs. Sec. 301.6402-2(b), refund claims must set forth in detail each ground on which a refund is claimed, including facts sufficient to apprise the IRS of the exact basis of the claim. All grounds on which a taxpayer relies must be stated in the original refund claim so the Service will know what to consider; the IRS can take the claim at face value and examine' only those points to which its attention is necessarily directed by the claim. This provides the Service with adequate information to consider and dispose of claims without the need for litigation, and thus to avoid surprise. Another purpose is to limit litigation to the issues that have been reexamined by the IRS and that it is prepared to defend.

Amount claimed: Refund claims frequently demand or request the return of a specified amount. There is a question as to whether a taxpayer can receive a larger amount if it is later determined that the taxpayer is entitled to a larger refund than the dollar amount originally stated in the claim. In F. W Woolworth Co., 91 F2d 973 (2d Cir. 1937), cert. denied, the court allowed recovery in excess of the amount stated, because the refund claim also requested the return of "such greater amount as is legally refundable." The opinion suggested that a recovery for a greater amount was allowable even without an express claim for such greater amount. In Austin National Bank v. Scofield, 84 F Supp 483 (DC Tex. 1948), however, the court limited the taxpayer's recovery to the amount claimed, even though the refund claim contained obvious mathematical errors in computing the taxes. To avoid this problem, add the clause "or such greater amount as is legally refundable" to the claim, leaving open the door for a refund in excess of the specified dollar amount.

Variance between facts and claim

The variance doctrine also can limit a taxpayer's ability to obtain a refund. Under this doctrine, a taxpayer may not raise issues or claims in a refund suit if the taxpayer has not previously raised them in an administrative claim filed with the Service (Real Estate-Land Title & Trust Co., 309 US 1-3 (1940)). Thus, this doctrine essentially limits a taxpayer's suit for refund to the grounds shown in the refund claim. The government often seeks to have refund suits dismissed for lack of jurisdiction based on the differences between the grounds asserted in the suit and those in the claim. Similar to the sufficiency requirement, the variance doctrine is designed to ensure that the Service gets a sufficiently detailed claim and to prevent factual surprises at trial.

Refunds of all possible overpayments should be demanded and all possible grounds for recovery should be stated in the refund claim; even weak grounds should be included. The tax laws are constantly changing, and a position that is relatively weak when the claim is filed could later become much stronger due to changes in the law or the discovery of favorable evidence before the case is ultimately resolved.

In addition to specific claims, practitioners should consider making a separate general claim in each refund request filed. A specific claim requests relief based on an asserted fact situation or specific deductions; a general claim merely asserts that the IRS has assessed tax on too much income or that the taxpayer is entitled to deductions not taken or granted. An example of a general claim is to request "any additional amounts determined to have been erroneously or illegally assessed or collected that are refundable on the facts and grounds stated or on any other facts."

Including a general claim in a refund claim is valuable when the original claim is weak and an alternative ground of recovery is later discovered. Taxpayers may normally amend a general claim any time before the Service acts on the refund claim (Factors & Finance Co., 288 US 89 (1933)). Specific claims may be amended before the IRS acts and after the SOL has expired, but only if no new investigation of facts is required (Bemis Bros. Bag Co., 289 US 28 (1933)). While a general claim will probably not be sufficient to maintain a refund suit, it may be sufficient to keep the door open to argue alternative theories at the administrative level.

Forms to use

The proper form to use for a refund claim varies. Income tax refund claims should be made on the appropriate return (or amended return if the return has already been filed). Individuals who have filed Form 1040, 1040A or 1040EZ should use Form 1040X to claim a refund. Corporations that have filed Form 1120 should claim refunds on Form 1120X. Taxpayers other than individuals or corporations should use the appropriate amended return. For example, an exempt organization must file an amended Form 990T, Exempt Organization Business Income Tax Return, and a fiduciary must file an amended Form 1041, U.S. Fiduciary Income Tax Return (see Regs. Sec. 301.6402-3). Form 843 is used to claim refunds of taxes other than income taxes and for refunds of interest (except interest on tax when the tax itself is claimed), penalties and/or additions to tax.

"Quickie refunds": A different form should be used to obtain "quickie refunds" from carry-backs of net operating losses, capital losses and certain credits. Corporations should use Form 1139, Corporation Application for Tentative Refund, and other taxpayers should use Form 1045, Application for Tentative Refund. Also, corporations may use Form 4466 to obtain a "quickie refund" of estimated tax overpayments. Note that the filing of any of these forms does not c the filing of a formal refund claim; see Secs. 6411(a) (last sentence) and 6425(b)(4). Consequently, before a refund suit can be brought, a formal refund claim (e.g., Form 1120X) must be timely filed, notwithstanding the prior filing of a "quickie refund" claim (e.g., Form 1139).


In preparing refund claims, always remember the following:

* Use the correct form to claim the refund.

* Make sure the claim contains sufficient facts to apprise the IRS of the exact basis of the claim.

* In addition to requesting the refund of a specific dollar amount, also request the return of "such greater amount as is legally refundable."

* Include all possible grounds of recovery in the claim.

* Include a general claim for relief in addition to the specific claims.
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Article Details
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Author:Wright, Jeffrey M.
Publication:The Tax Adviser
Date:Nov 1, 1993
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