New, improved Form 872.

• Author: Stein, Ronald A.
• Position: Tax assessment extension form

Without fanfare, the Service revised Form 872, Consent To Extend the Time to Assess Tax, in June 1996. Omitted from the new form is a key provision that had been present for nearly two decades. The change should come as welcome news to tax practitioners. To the IRS's credit, this change helps eliminate a subtle and potentially costly refund trap.

The deleted language, first added in 1979, provided that Form 872 would terminate on the earlier of the agreed expiration date or "the assessment date of an increase in ... tax that reflects the final determination of tax and the final administrative appeals consideration." The trap lay in computing the time for filing a refund claim if the taxpayer had previously agreed to a deficiency assessment for the tax year.

Sec. 6511(a) establishes the general rule that a taxpayer has the longer of three years from the time the return was filed or two years from the payment of the tax within which to file a refund claim. In conjunction with these limitations, Sec. 6511(b)(2) limits the amount of recovery to the tax paid within the three years immediately preceding the filing of the claim or the tax paid within two years preceding the filing of the claim. Sec. 6511(c)(1) provides that if the statute of limitations (SOL) on assessment is extended by agreement, the refund period is automatically extended for the same amount of time, plus six months. The refund lookback period is extended commensurately (Sec. 6511(c)(2)).

Under old Form 872, the Service would argue from time to time that deficiency tax assessed by agreement (e.g., under the authority of Form 870, Waiver of Restrictions on Assessment and Collection and, Acceptance of Overassessment, or Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax and to Accept Overassessment) constituted a final determination of tax and (in the case of Form 870-AD) the final appeals consideration. Thus, the taxpayer had six months from the assessment date, rather than (as many taxpayers automatically assumed) six months from the expiration date spelled out in writing by the parties in Form 872, to file a refund claim eligible for the three-year lookback as extended by reason of Sec. 6511(c)(2).

Example: X, a domestic corporation, timely filed its 1993 Federal income tax return on Mar. 15,1994, reflecting tax due of $5,000,000, which amount was satisfied by estimated tax payments. On Aug. 1, 1996, the IRS began an examination of the return. During...