Editor: Christine M. Turgeon, CPA
Various periods of limitation apply to claims filed with the IRS in the context of underpayment interest under Sec. 6601 or overpayment interest under Sec. 6611. Taxpayers should be aware of the time frames to file refund claims for overpaid underpayment interest and claims for additional overpayment interest, as well as important actions needed to "fully protect" taxpayer rights.
Sec. 6601 provides that if tax imposed by Title 26 is not paid by the due date for payment, underpayment interest must be paid on the unpaid amount, at the underpayment rate under Sec. 6621. Sec. 6611 provides that overpayment interest will be allowed and paid on any overpayment in respect of any internal revenue tax at the overpayment rate established under Sec. 6621.
Sec. 6621 defines the applicable rates for both underpayment and overpayment interest, which are determined on a quarterly basis. Further, Sec. 6621(d) provides that a net interest rate of zero applies to interest accruing on or after Oct. 1, 1998 (and if certain conditions are met, to interest accruing before Oct. 1, 1998) on equivalent overlapping tax underpayments and tax overpayments (so-called interest netting).
Note: This item focuses on interest netting between different tax periods and/or types of tax ("net rate" netting claims). Special rules beyond the scope of this discussion apply to interest netting within a single tax period (within-module netting).
If a taxpayer disagrees with the amount of underpayment interest imposed by the IRS or believes the IRS should pay additional overpayment interest, the taxpayer may file an administrative claim/request with the IRS. Rev. Proc. 2000-26 provides that an interest-netting claim must be filed on a Form 843, Claim for Refund and Request for Abatement. In certain contexts (noted below), a taxpayer may not be required to file a Form 843 administrative claim and simply may file suit against the government. In each context, the question arises: When is it too late to file the claim?
A claim seeking a refund or credit of overpaid underpayment interest must be filed within the period of limitation provided in Sec. 6511. In this context, the claim generally must be filed by the later of (1) three years from the time the return (to which the interest relates) was filed or (2) two years from the time the payment was made (Sec. 6511(a)). If the claim is filed within the three-year period, the amount that the IRS may refund or credit is limited to the amount of tax (including interest) paid within the period, immediately preceding the filing of the claim, equal to three years plus the period of any extension of time for filing the return (Sec. 6511(b)(2)(A)). If the claim is filed within the two-year period, the amount that the IRS may refund or credit is limited to the amount of tax (including interest) paid during the two years immediately preceding the filing of the claim (Sec. 6511(b)(2)(B)).
If the IRS formally disallows a taxpayer's claim for refund or credit of underpayment interest, or does not act on it within six months, a taxpayer generally may file a refund suit in a U.S. district court or the U.S. Court of Federal Claims. Sec. 6532 provides a two-year limitation period from the date of the disallowance for filing a refund suit. This two-year period can be extended by agreement by the IRS and the taxpayer. Form 907, Agreement to Extend the Time to Bring Suit, is used for that purpose.
The filing of an administrative claim for refund or credit, and its actual or deemed disallowance, are prerequisites to the filing of a refund suit for previously paid underpayment interest (Sec. 7422(a)).
Period of limitation for filing general claims against the government
If a taxpayer disagrees with the amount of overpayment interest allowed by the IRS — for example, a refund is issued but with insufficient overpayment interest — a claim for additional overpayment interest may arise. Such a claim is not a refund claim governed by the refund procedures in Sec. 6511 and related provisions. Instead, it constitutes a general claim against the government and, as such, is governed by the six-year limitation period of 28 U.S.C. Sections 2401 and 2501 (Alexander Proudfoot Co., 454 F.2d 1379, 1384 (Ct. Cl. 1972)).
In the U.S. Code, 28 U.S.C. Section 2401 provides that "every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues." Furthermore, 28 U.S.C. Section 2501 states that "[e]very claim of which the United States Court of Federal Claims has jurisdiction shall be barred unless the petition thereon is filed within six years after such claim first accrues."
The six-year period of limitation applicable to a claim for additional overpayment interest begins when the cause of action for overpayment interest first accrues, which is the date the related credit or refund is allowed (Barnes, 137 F. Supp. 716 (Ct. Cl. 1956), cert. denied, 351 U.S. 933 (1956)). That is the date the IRS authorizes the scheduling of an overassessment (Sec. 6407; see also General Instrument Corp., 33 Fed. Cl. 4 (1995)).
Regs. Sec. 301.6407-1 provides further that the date on which the district director, the director of the regional service center, or an authorized certifying officer designated by either of them certifies the allowance of an overassessment in respect of any internal revenue tax shall be considered as the date of allowance of refund or credit in respect of such tax (see also Internal Revenue Manual (IRM) §§184.108.40.206.2.12.1(4) and 220.127.116.11.2.2.3(1)).
A time frame within which a "civil action" — that is, a suit in district court or the Court of Federal Claims — may be filed is provided in 28 U.S.C. Sections 2401 and 2501. However, the IRS has addressed the filing of administrative claims for additional overpayment interest in both formal and informal guidance.
Rev. Rul. 56-506 states that "no allowance of interest on a refund or credit of an overpayment of tax may be made after the expiration of six years from the date of the allowance of the refund or credit unless a taxpayer has filed a civil action against the United States within such period."
Rev. Rul. 57-242 provides that the IRS will entertain administrative claims for additional overpayment interest and that such claims may be allowed and paid by the IRS upon the taxpayer's request at any time within six years from the date on which the schedule listing the overpayment is signed. However, the ruling makes clear that:
- The filing of such an administrative claim does not suspend the running of the six-year limitation period for filing suit; and
- A taxpayer must file a timely suit to "fully protect" its rights to additional overpayment interest.
In Chief Counsel Advice (CCA) 200532001 (released Aug. 12, 2005), the IRS Office of Chief Counsel directly addressed the issue of whether the IRS has the authority to allow an administrative claim for additional overpayment interest that was filed within the six-year limitation period, even though the taxpayer fails to file suit within the six-year period, and concluded that it does have such authority.
After acknowledging that a literal reading of Rev. Rul. 56-506 may appear contrary to the conclusion of the CCA, Chief Counsel explained that that ruling did not contemplate the filing of administrative claims for additional overpayment interest and instead addressed only whether the IRS could allow and pay overpayment interest when the taxpayer filed its suit after the expiration of the six-year period.
Chief Counsel instead looked to Rev. Rul. 57-242 to resolve the issue and interpreted the statement in that ruling that overpayment interest "may be allowed and paid upon request at any time within six years" as meaning only that the taxpayer's administrative request must be made within the six-year period. Accordingly, Chief Counsel concluded that no time limit applies to the IRS's allowance and payment of additional overpayment interest, as long as the taxpayer's administrative request was timely. However, Chief Counsel reiterated that a taxpayer must file a timely suit to "fully protect" its rights to additional overpayment interest.
The relevant provisions of the IRM do not appear to be completely consistent. For example, IRM Section 18.104.22.168.2.12.1(2) provides that "[a]n administrative claim [for additional overpayment interest] may be allowed and paid upon request at any time before the [six-year] period for filing suit [under 28 U.S.C. Sections 2401 and 2501] expires," citing to Rev. Rul. 57-242 (emphasis added).
However, IRM Section 22.214.171.124.6.2, which provides guidance to assist IRS employees in determining the netting status for the credit or refund of overpayment interest, instructs the employee to determine whether the claim was received within six years from the date of scheduling of the overpayment and provides that, if the answer to that question is yes, then the overpayment netting status is "open," and additional interest may be allowed on the overpayment (citing to Sec. 6407 and 28 U.S.C. §§2401 and 2501; see also IRM §126.96.36.199.2(5)).
Note, however, that while a taxpayer may file an administrative claim or request for additional overpayment interest, this is not a requirement to file suit. Although filing a claim for refund with the IRS is a jurisdictional prerequisite for filing a suit for refund, no such statutory prerequisite exists for filing a suit for additional overpayment interest (see Sec. 7422 and 28 U.S.C. §§2401 and 2501; but also see IRM §188.8.131.52.2.12.1(2)).
Observation: If a taxpayer wishes to file suit against the government for additional overpayment interest, the question arises as to the appropriate court. In The E.W. Scripps Co., 420 F.3d 589 (6th Cir. 2005), the Sixth Circuit held that federal district courts have subject-matter jurisdiction (concurrent with the Court of Federal Claims) over taxpayer suits for interest on tax overpayments (see also Ford Motor Co., 768 F.3d 580 (6th Cir. 2014), cert. denied, 576 U.S. 1035 (2015)). However, the Second, Eleventh, and Federal Circuits have all held that the Court of Federal Claims has exclusive jurisdiction over suits against the government for additional overpayment interest (Pfizer, 939 F.3d 173 (2d Cir. 2019); Paresky, 995 F.3d 1281 (11th Cir. 2021); Bank of America, 964 F.3d 1099 (Fed. Cir. 2020)).
Another key point is that, while the two-year period to bring suit under Sec. 6532 may be extended by agreement by the IRS and the taxpayer with Form 907, the six-year period of limitation to file suit against the government for additional overpayment interest cannot be extended by agreement.
Net rate interest netting claims
As stated above, Sec. 6621(d) provides that a net interest rate of zero applies to interest on equivalent overlapping tax underpayments and tax overpayments. Rev. Proc. 2000-26 provides guidance with respect to the application of the interest-netting procedures to interest accruing on or after Oct. 1, 1998, including the requirements and time limits for filing interest-netting claims.
Although, as noted above, a taxpayer can file a suit for additional overpayment interest without first having filed an administrative claim with the IRS, the Service has requested that taxpayers file administrative claims for the application of the net interest rate of zero because it is not able to automatically determine when the net interest rate of zero applies (Rev. Proc. 2000-26, §4.01).
Section 4.03 of that revenue procedure provides that the IRS achieves the "net rate of interest" of zero:
- If the Sec. 6511 period of limitation for refunding underpayment interest is open at the time a claim is filed, by decreasing underpayment interest owed by the taxpayer (to match the overpayment interest for the equivalent period); or
- If the Sec. 6511 period of limitation for refunding underpayment interest is closed at the time a claim is filed, but the period for paying additional overpayment interest is open, by increasing overpayment interest owed to the taxpayer (to match the underpayment interest for the equivalent period).
In Section 4.02, the revenue procedure further provides that "[a] claim for payment of additional interest allowable on an overpayment pursuant to section 6611 must be filed within the 6-year period in which a suit must be filed pursuant to 28 U.S.C. sections 2401 and 2501."
Interest claims can implicate the periods of limitation under Sec. 6511 (and related provisions) and/or the six-year periods of limitation under 28 U.S.C. Sections 2401 and 2501. To evaluate the timeliness of a claim, the taxpayer needs to determine whether it is a refund claim or a claim for additional overpayment interest. With net rate interest netting claims, both statutory frameworks may be implicated.
In the context of the six-year period of limitation, identifying when the cause of action accrues is fundamental, as this starts the running of the period. The six-year period cannot be extended by agreement (unlike the two-year period to bring suit under Sec. 6532). The only way to "fully protect" the rights of the taxpayer under the six-year period is to file suit. Should a taxpayer wish to file suit, care should be taken in evaluating relevant case law, as jurisdictional hazards abound.
Christine M. Turgeon, CPA, is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in New York City.
For additional information about these items, contact Ms. Turgeon at 973-202-6615 or email@example.com.
Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.