Key Takeaways | Navigating IRS Tax Refunds

During this webinar, members of McDermott’s Tax Controversy & Litigation Group detailed how to claim and collect Internal Revenue Service (IRS) tax refunds. The presentation included an overview of the relevant rules, refund strategies, and best practices for navigating IRS tax refunds.

Top takeaways included:

1. Know the Different Types of Refund Claims. There are four primary refund types – formal, informal, protective, and tentative – and each type has a specific purpose. Selecting the right type of claim depends on a taxpayer’s situation, timing, and whether the claim is contingent on future events.
2. Clearly Explain the Basis for the Claim. Every refund claim should include a detailed, well-supported explanation of the legal basis and factual grounds for the refund, including any alternative grounds.
3. Timing and Strategy Are Crucial. Immediately filing a refund claim may not always be the right move. Strategically timing when to file can help avoid putting unrelated tax issues at risk of examination. It is important to consider how a refund claim fits into the broader context of a taxpayer’s return and tax position. Proactive follow-up with the IRS or escalation through the appropriate channels is often necessary help move the refund claim process forward since processing delays are common.
4. Keep an Eye on the Statute of Limitations. As mentioned, timing is critical when it comes to refund claims. Refund claims generally must be filed within three years of filing the original tax return or within two years of paying the tax (whichever period expires later). Taxpayers that have agreed to extend the IRS’s statute of limitations on assessment have an additional six months to file a refund claim. Being aware of these deadlines can help avoid losing refund opportunities.
5. Utilize Protective Claims to Preserve Rights. A protective refund claim can safeguard your rights as you wait for the outcome of a related event, such as pending litigation or regulatory changes. These claims should be clearly labeled as protective and filed before the statute of limitations expires. This approach allows you to preserve your refund claim while contingent events play out.
6. Prepare for Varying IRS Outcomes. Once filed, a refund claim may be approved and paid, examined, disallowed, or not acted upon at all. Each outcome requires a different strategy. Inaction from the IRS may necessitate filing a refund suit. If a claim is disallowed, taxpayers may pursue their refunds through litigation or by appealing the disallowance at the IRS Independent Office of Appeals – but be aware of the statute of limitations.
7. Be Wary of Penalties and Privilege Risks. The IRS is increasingly asserting penalties for erroneous refund claims. While the “reasonable cause” defense may be available, raising this defense may risk waiver of the attorney-client privilege. A taxpayer should weigh that risk when developing refund strategies.