Benefits of protective refund claims.

• Author: Urban, Michael

A "protective" claim for refund can be a valuable tool for the proactive tax professional. While a proper protective claim does not include all the information necessary to establish the taxpayer's right to recover an overpayment, it will be accepted as valid for limitations purposes.

Under Sec. 6402(a), the IRS may allow a credit or refund after the expiration of the limitations period only if a claim has been timely filed (i.e., filed within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later). Regs. Sec. 301.6402-2 sets forth the basic requirements that must be satisfied by claims for credit or refund, including protective claims. These include a requirement that the claim set forth in detail each ground on which a credit or refund is claimed and facts sufficient to apprise the Service of the exact basis for the claim.

Except when regulations impose additional requirements for claims relating to a particular kind of tax, a refund claim is valid if it complies with the basic requirements. In GCM 38786, the IRS stated the most important requirement "is that the claim state the grounds [for the credit or refund] and supporting facts"; thus, a claim setting forth only a general or "shotgun" basis is not sufficient. However, GCM 38786 went on to say, "this requirement should be interpreted liberally. So long as the claim apprises the Service of the essential nature of the claim, it should be seen as satisfying this requirement."

The situations in which a tax practitioner should consider filing a protective claim typically arise when expiration of the refund statuute is looming and:

1. the taxpayer is unable to submit supporting information that establishes its actual right to a refund,

2. the taxpayer is unable to quantify the claim precisely, i.e., calculate the exact amount of the claimed overpayment,

3. there is pending litigation on the issue involved in the protective claim, the results of which may substantially affect whether the Service allows the claim,

4. an expected change to the Code or the regulations may have a substantial impact on the decision whether to allow the claim, or

5. the IRS has proposed changes in a tax year under examination that would, if sustained, create an overpayment in another tax year.

GCM 38786 provides that when the taxpayer is unable to submit the information needed to establish the taxpayer's right to recover the overpayment with a...