Obtaining IRS Refunds: Procedures and Strategies, It's rarely as simple as you think.

• Author: Kovacev, Robert J.

Uncertainty in tax law is reaching unprecedented levels. In the past four years, taxpayers have managed dramatic tax reform, pandemic-fueled emergency tax legislation, rafts of new Treasury Regulations (and accompanying challenges to some regulations), and increased aggressiveness by certain tax authorities. Tax departments now must be nimbler than ever as they adjust to these changes while preparing for the prospect of even more.

One key tool at their disposal is the ability to file a refund claim. Filing a refund claim may appear as easy as filing a Form 1120X, Amended US Corporation Income Tax Return. It is rarely that simple. Between Internal Revenue Service processing delays and aggressive enforcement, obtaining a claimed refund can be far from routine. This article focuses on the tricks and traps for preparing, filing, and, if necessary, defending a refund claim.

What's Required for a Refund Claim?

Treasury Regulations Sections 301.6402-2 and 6402-3 together prescribe how a taxpayer makes a refund claim, including when the claim may be filed, what forms to use, the location for filing, signature requirements, and other procedural matters. Refund claims for income tax are generally filed on an amended income tax return, such as Form 1120X.1 Refunds for other types of tax, such as employment and certain excise taxes, should be requested on amended returns for the relevant tax (for example, Form 941X for employment tax refund claims). Form 843, Claim for Refund and Request for Abatement, is used for certain situations not otherwise covered, such as claims for interest or penalties.

A refund claim must 1) set forth in detail each ground upon which the credit or refund is claimed; 2) present facts sufficient to apprise the IRS of the exact basis for the claim; and 3) contain a written declaration made under penalties of perjury. A general statement that a taxpayer is owed a refund, without explaining the grounds for the claim, is insufficient.2 If a claim provides the IRS with notice of the nature of the claim, the entities claiming the credit, and the legal theory for the refund claim, however, courts consider the claim valid.3 Further, if the IRS examines a refund claim that is facially insufficient, but the taxpayer provides the necessary information during the examination, the insufficiency is cured and the IRS waives any argument for invalidity.4

It is imperative that taxpayers include all of their potential grounds for refund in the claim, including any alternative or inconsistent arguments. The reason is that under the "variance doctrine," the courts will not consider a ground for refund that the IRS did not have the opportunity to audit and consider at the administrative level. Taxpayers facing variance issues should consider whether any time remains on the statute of limitations to amend the refund claim or whether the taxpayer can show that the IRS considered an alternative ground for refund not included in the claim.

In a recent Chief Counsel Memorandum,5 the IRS announced new specificity "requirements" for it to consider a research credit refund claim valid. These requirements are that the claim:

* identifies all the business components to which the research credit claim relates for that year;

* identifies, for each business component, all research activities performed, all individuals who performed each research activity, and all the information each individual sought to discover; and

* provides the total qualified employee wage expenses, total qualified supply expenses, and total qualified contract research expenses for the claim year (which may be done using Form 6765, Credit for Increasing Research Activities).

Starting January 10, the IRS now deems any claim for a research credit refund legally insufficient if it does not contain all these specific details and therefore may reject the claim without examination or consideration of the merits. The IRS has never before required such specificity, and in the past few refund claims contained such detailed information in the claim itself, so this represents a significant departure from prior practice.6 This may be a foretaste of increased IRS scrutiny of refund claims in other contexts.

Historically, taxpayers under examination were able to make claims informally with their exam teams, without necessarily having to file an amended return. For example, taxpayers under the Coordinated Industry Case program could disclose any items that would result in an adjustment, including items that would result in a refund, in a written submission to the Exam team without filing an amended return.7 Currently, under Publication 5125, Large Business & International (LB&I) taxpayers may make informal refund claims to the Exam team within thirty days of the opening conference. After that date, Publication 5125 requires any refund claim to be filed on an amended return.8

An informal claim must contain 1) a written request for a refund that 2) specifies the tax and the year for which the refund is sought and 3) provides sufficient notice to allow the...