When I teach Civil Procedure, I joke that the acronym SOL is particularly appropriate for Statutes of Limitations. Students laugh. But blowing an SOL will not only cause clients to cry tears, it may well cause clients to cry “malpractice!”
Tax law is full of SOLs. We easily think of the ones that limit the IRS's ability to assess or collect. But SOLs affect taxpayers as well, notably the §6511 SOL for filing refund claims. Last week’s case of Robert William Porporato v. Commissioner, T.C. Sum. Op. 2020-24 (Aug. 18, 2020) (Judge Panuthos) teaches a lesson in vigilance: the taxpayer lost a potential $12,000 refund because of the §6511 SOL. While this taxpayer was pro-se all the way, and so had no one to blame but himself, the case is a useful lesson for practitioners: don’t let the sneaky §6511 SOL rules catch you napping. Details below the fold.
Law: Overview of §6511 SOLs on Refunds
Section 6511 is titled “Limitation on Credit or Refund.” It actually contains two different limitation periods: a period within which a taxpayer must file a claim for refund, and a lookback period to determine what prior payments can be recovered. Both are important.
First, §6511(a) limits the time for filing a claim. The rule is deceptively simple: a refund claim is timely if it is filed either (1) within 3 years “from the time the return was filed,” or (2) within two years “from the time the tax was paid.”
To calculate either period, you need to know two dates: the date the return was filed (or the relevant tax was paid) and the date the refund claim was filed. Complexity arises from many sources. Let me give just one example: determining when a return was “filed.”
Generally, a return which is sufficient to start the assessment limitation period in §6501 is also sufficient to start the refund claim limitation period in §6511. For example, a return which is filed early is deemed filed on the due date. §6501(b)(1). So the three year period for a Form 1040 filed on March 15th will normally be April 15. That rule disregards extensions. Id. If a return is filed after the due date, the three year period starts on the actual date of filing, which is governed by the physical delivery rule: the date the return is actually received in the proper IRS office.
But what counts as a filing for the assessment period may differ from what counts for the refund period. For example, a fraudulent return, while ineffective to trigger the §6501 limitation on assessment, §6501(c)(1), is effective to trigger the §6511 limitation on refund claims. Plunkett v. Commissioner, 465 F.2d 299 (7th Cir. 1972).
With COVID-19 making a shambles of the 2020 filing season for 2019 returns, you may want to really pay attention to the physical delivery rule and the idea that what counts for assessment may differ than what counts for refund. A return might well be considered “received” for timely filing purposes on the date it was delivered to the right IRS office----say on July 15, 2020---but practitioners may want to argue that a return was not “received” for refund limitation purposes until the IRS actually processed the return, a date you can find on the transcript.
Similarly, determining when a refund claim is filed can be tricky. That is because refund claims can literally take different forms. Treasury Regulations require that a person submit refund claims on either a valid original return or a valid amended return. Treas.Reg. 301.6402-3(a)(1), (2). And a return or amended return are the usual ways taxpayers self-report overpayments and ask for the money back. But the courts say that “What is essential is that the taxpayer must inform the Internal Revenue Service that a claim for a refund is being asserted, and must provide enough information so that the IRS can adequately examine the merits of the claim." Evans v. United States, 618 F. Supp. 621, 622-23 (E.D. Pa. 1985), aff'd, 787 F.2d 581 (3d Cir. 1986)(citations omitted). Thus the IRS accepts other forms and will also accept a pretty wide variety of documents as “informal claims” and process them accordingly. See e.g. IRM 220.127.116.11 (“Informal claims can include a letter or other document...requesting changes to obtain the correct and accurate reflection of his/her tax liability.”). See generally IRM 18.104.22.168.2.6.3 (Informal Claims).
Note that an NOD can also be a refund claim. If a taxpayer contests an NOD and wins, §6512(b)(3)(C) provides that the NOD will be treated as a claim for refund filed on the date the NOD was sent.
Second, §6511(b) limits the amount available for refund or credit. It provides that only the amounts that the taxpayer paid within the applicable lookback period from the refund claim filing date can be recovered by the claim for refund. It also contains two time periods that parallel those in §6511(a): a three-year lookback period for refund claims that are subject to the §6511(a) three-year period, and a two-year lookback period for refund claims that are subject to the two-year period. The reason for the lookback periods is to prevent taxpayers from being able to extend the refund limitation period indefinitely by either making periodic payments (thus triggering a new two year refund claim limitation period) or by filing a return years after it was due (thus triggering the three year refund limitation period). Thus the basic idea of § 6511(b) is that the taxpayer can only obtain a refund of payments made within the two or three year period looking back from the date the refund claim is filed, depending whether the claim was filed under the two year or three year refund claim limitation period in § 6511(a).
Here, the key date to know is the date of the payment constituting the overpayment. Here, Congress cuts taxpayers two breaks. First, estimated payments and amounts withheld from wages or from other income by third-party payors are deemed to be made on the statutory due date of the return, even though they are actually made much earlier. §6513(b)(2). But that deemed payment date does not include any filing date extensions the Service may give the taxpayer. Baral v. United States, 528 U.S. 431 (2000). So that is why you need the second break, found in §6511(b)(2). That provision extends the three-year lookback period by "the period of an extension of time for filing the return." Again, that is what you need to know for the COVID filing season. A 2019 return filed on July 15, 2020 triggers the three-year refund claim period and §6511((b)(2) is what then provides that the three-year lookback period will be extended back to April 15, 2020, which is when all estimated taxes and withheld taxes for 2020 are deemed paid.
These §6511(b) lookback periods are separate and distinct from the §6511(a) refund claim limitation periods. Thus, one may actually file a timely claim but nonetheless be entitled to a zero refund because one had made no payments during the applicable lookback limitation period. See Baral, supra. See also Wertz v. United States, 51 Fed. Cl. 443 (2002)(taxpayer’s 1998 refund claim for 1993 wage withholding was timely because filed within three years of the taxpayer’s late-filed 1993 return, but three year lookback limitation period precluded recovery of overwithheld wages because they were deemed paid on April 15, 1994).
Readers should be aware of the recent case of Borenstein v. Commissioner, 919 F.3d 746 (2d Cir. 2019) which teaches an important lesson about the interplay of §6511(a) and §6511(b). There the Second Circuit took a decidedly functional approach to statutory interpretation, overruling the Tax Court’s decidedly textual approach, to allow a taxpayer’s amended return, filed after the IRS issued an NOD, to count as the relevant “claim” for refund. The topic is beyond the scope of this post, but I highly recommend Keith Fogg’s two excellent posts on the subject, here and here.
The IRS was attempting to collect Mr. Porporato’s unpaid tax liabilities for 2009, 2010, and 2011. The liabilities for 2009 related to a timely filed return. The other two years were based on SFRs for which Mr. Porporato received NODs but did not file Tax Court petitions. For all three years, however, it seems that Mr. Porporato’s problem was simply under-withholding. In each year he received some $20,000 credit for taxes withheld, but his assessed taxes averaged about $10,000 more per year.
It appears Mr. Porporato also had unpaid tax liabilities for prior years, including 2007 and 2008. Those liabilities appear to have the same cause as the 2009, 2010, and 2011 liabilities: under-withholding and a failure to pay the balance due. By the time he late-filed his 2012, 2013, and 2014 returns, it seems the under-withholding had been fixed. Mr. Porporato claimed modest overpayments based on over-witholding. On those returns the IRS re-calculated and reduced the overpayments under its obnoxiously broad math error authority in §6213(b)(1). Instead of refunding the overpayments the IRS then applied them to reduce the 2007 and 2008 liabilities. Yes, the IRS can do that, even if you designate the overpayments for a future liability. See Treas. Reg. 301.6402-3(a)(6).
Mr. Porporato was able to get a CDP hearing to contest the collection of his 2009, 2010 and 2011 liabilities. His basic argument was the IRS had misallocated the various small overpayments for 2012-2014 and had failed to credit him for a really big overpayment he had made for his 2005 tax year.
It’s the 2005 tax year overpayment that provides our lesson. For that year Mr. Porporato had late-filed a joint return with his wife. When the 2005 year went to collection in 2009, Mr. Porporato missed the deadline for a CDP hearing but was able to secure an equivalent hearing.
During his interaction with Appeals over the 2005 liability he filed an amended 2005 return. He filed the amended return on March 29, 2010. Note that date. It apparently showed a smaller liability that had been assessed. The IRS accepted and processed the amended return and abated the outstanding liability for 2005 down to zero.
In the current case, Mr. Porporato said that the amended 2005 return had also shown an overpayment of some $12,000. He said that the IRS had not properly credited his 2009-2011 liabilities with that overpayment.
Lesson: SOL on $12,000
Mr. Proporato’s original 2005 return was filed on June 15, 2006. Regardless of whether he had obtained an extension, that filing triggered the §6511(a) limitation period. So he had until June 15, 2009 to file a claim for refund if he believed he had actually overpaid the tax. And, if he had filed timely, the IRS would refund or credit any payments he made back to April 15, 2006, which would have included the $12,000. But he did not file timely. Remember, he did not file his amended return until March 29, 2010. That missed the deadline by over nine months.
The period after June 15, 2006, appears to have been a turbulent one for Mr. Proporato. The return was a joint return, but he and his wife divorced in 2007, and she filed a spousal relief claim in 2008. The opinion is silent on the outcome of her claim. Still, one can well imagine how time flies not only when one is having fun but also when one is having troubles. As we age, three years becomes a shorter and shorter time period. Sure, maybe to a sophomore in high school, graduation in three years seems far away. But time speeds up as we grow up. That is why §6511 is sneaky. It snuck up on poor poor Mr. Porporato who was indeed SOL on the refund claim.
Coda 1: Mr. Proporato’s amended return was not totally useless. The IRS accepted it and used it to abate the uncollected 2005 assessments. Why could the IRS abate but not refund? The answer is because refunds have those sneaky limitations in §6511 but the IRS’s abatement authority is not so limited. The abatement authority is in §6404 and there is no time limitation in that statute.
Coda 2: Judge Panuthos commits a common and understandable error here, writing that "respondent abated his outstanding liability for tax year 2005.” Op. at 9 (emphasis added). But §6404 does not permit the IRS to abate a liability. It permits the IRS to abate “the assessment of any tax or any liability....” (emphasis added). That difference is well explained in Chief Counsel Notice 2001-014 (“Section 6404(c) Abatements”)(sorry, no free link; you have to use LEXIS or Westlaw to get it). But you can find a similar explanation in In Re Becker, 407 F.3d 89 (2nd Cir. 2005).
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return to TaxProfBlog each Monday for a new Lesson From The Tax Court.