Who Is Interested in My Request for Interest? Procedural missteps can risk taxpayers' pursuit of overpayment interest from the IRS.

AuthorMorris, Robert C.

The law is clear: "If a taxpayer overpays its taxes, the IRS owes the taxpayer interest on that amount."' This obligation certainly characterized the Internal Revenue Service's 2020 fiscal year, in which the IRS paid more than $3 billion of overpayment interest to taxpayers.2 This figure is just the latest in a series of increasing amounts of interest the IRS paid to taxpayers in recent years.

The IRS must pay overpayment interest in a number of situations, including refunds issued for past tax years related to refund claims (for example, foreign tax credit claims and research credit claims), refunds received after the resolution of a tax dispute (whether with Exam or Appeals or through litigation), and delays by the IRS in processing net operating loss carrybacks and other refund payments. Determining the amount of overpayment interest owed is often extremely complex, especially for corporate taxpayers when interest netting, carrybacks, offsets, and multiple tax years are involved. The IRS does not always calculate overpayment interest correctly and sometimes even fails to pay overpayment interest at all. What should a taxpayer do if the IRS issues a tax refund with insufficient overpayment interest, or with none at all? Must the taxpayer file an administrative claim with the IRS for the missing overpayment interest? What if the IRS denies or fails to respond to an administrative claim? May the taxpayer sue? If so, in which court and under what time limitations, if any?

Procedural missteps in this area can be costly and result in losing the opportunity to pursue overpayment interest from the IRS. And far from providing clarity, recent court decisions have made the rules governing claims for stand-alone overpayment interest increasingly unclear.' This article focuses on the practical steps that taxpayers may take to protect their rights to recover overpayment interest from the IRS.

Increasing Murkiness of Bringing Stand-Alone Overpayment Interest Claims

The authorities are split regarding the legal character of a claim for overpayment interest.

Some courts, referencing 28 U.S.C. Section 1346(a)(1), consider overpayment interest to be "any sum alleged to have been excessive .. . under the internal revenue laws." These courts generally apply the rules governing tax disputes to standalone claims for overpayment interest. Other courts have determined that overpayment interest is a "general debt" of the government and therefore not governed by the Internal Revenue Code's rules governing tax disputes. Crucial procedural questions hinge on this distinction, including 1) which statute of limitations applies when making overpayment interest claims, 2) what administrative steps, if any, a taxpayer must take to pursue such claims, and 3) which court or courts have jurisdiction to decide overpayment interest disputes.

The courts disagree on the nature of a claim for stand-alone overpayment interest. Unless the US Supreme Court resolves the various disagreements among the courts discussed below, the safest course of action for taxpayers is to position their claims for stand-alone overpayment interest both administratively and judicially so they can pursue the claim regardless of which competing position eventually prevails.

Statute of Limitations to Claim Overpayment Interest

Claims for overpayment interest are governed by either the 1) six-year statute of limitations if overpayment interest is a "general debt" of the government4 or 2) provisions governing tax disputes in the Internal Revenue Code. Determining which regime is most advantageous depends highly on the facts and circumstances of each claim. Taxpayers can sometimes proceed under both regimes but sometimes may have only one option.

If overpayment interest is a "general debt" of the government, then taxpayers have six years to file a lawsuit from the date that the cause of action or claim "first accrues," according to 28 U.S.C. Section 2501 ("general six-year statute"). To be clear, the general six-year statute is for filing a lawsuit for overpayment interest, not for filing an administrative claim with the IRS for overpayment interest. (Administrative claims are discussed below.) A claim for overpayment interest first accrues on the date that certain IRS officials certify that the refund or credit is allowed.5

The date that a claim for overpayment...

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