Temp. regs. expand IRS offset authority.

• Author: Goldberg, Walter S.

The IRS has issued temporary regulations under Sec. 6411 relating to the computation and allowance of tentative carry-back adjustments (i.e., tentative refunds) (TD 9355). The temporary regulations also serve as the text for proposed regulations (REG-118886-06). In general, the temporary regulations provide that the IRS can credit or reduce a tentative refund by unassessed liabilities determined in a notice of deficiency or identified in a proof of claim in a bankruptcy proceeding. (See Temp. Regs. Secs. 1.6411-2T and 1.6411-3T.) These regulations effectively change an IRS position that has been in effect for 30 years. In connection with the temporary regulations, the Service has also issued three revenue rulings relating to this issue: two that provide examples of how the IRS's crediting rights work and one that specifically revokes the 30-year-old position. (See Rev. Ruls. 2007-51, 2007-52, and 2007-53.)

Background

The general rules covering the IRS's authority to refund or credit overpayments are found in Secs. 6402(a) and 6411(b). Under Sec. 6402(a), the Service may credit the amount of any overpayment, including interest, against any tax liability of the person who made the overpayment and refund the balance (subject to certain other nontax debts). Likewise, Regs. Sec. 301.6402-1 provides that the IRS may credit any overpayment of tax against an outstanding liability for any tax owed by the person with the overpayment.

Sec. 6411(a) permits a taxpayer to apply for a quick refund of taxes by carrying back a net operating loss (NOL), a net capital loss, or an unused business credit to a prior tax year for which taxes were paid. Corporations (other than S corporations) use Form 1139, Corporation Application for Tentative Refund, to apply for a quick refund. Form 1139 must be filed within 12 months after the end of the tax year in which the NOL, net capital loss, or unused credit arose. The corporation must file its income tax return for the tax year no later than the date the Form 1139 is filed.

Sec. 6411(b) provides that within 90 days from the date that the Form 1139 is filed, the Service may make a limited examination of the application to discover omissions and computational errors and to determine the amount of the decrease in tax (refund). If there are no omissions or errors, the refund is then applied against certain items, including any tax or installment "then due" from the taxpayer. Any amount not so credited is refunded to the...