Editor: Alexander J. Brosseau, CPA
Taxpayers have a limited time to file refund claims with the IRS. Occasionally, this time limit may expire before the taxpayer’s right to the refund claim is finalized and determinable (e.g., during pending litigation). To preserve its right to claim a refund, the taxpayer must file a protective claim.
This item discusses the general requirements for refund claims, how those requirements apply to protective claims, and some common reasons for refund claims.
Refund claim requirements
Generally, taxpayers must file a refund claim with the IRS within three years of filing the tax return to which it relates or two years of paying the tax, whichever is later (Sec. 6511(a)). After that, Sec. 6511(b)(1) explicitly prohibits the IRS from issuing a refund or credit.
In addition to being timely, a refund claim must meet the specificity requirement in Regs. Sec. 301.6402-2(b). The refund claim must describe in detail each ground supporting the claim and include sufficient facts to apprise the IRS of the basis of the claim. In addition, a refund claim must be on the “appropriate income tax return” (Regs. Sec. 301.6402-3(a)). If it does not meet these regulatory requirements, it may still qualify as an “informal” refund claim (see Pala, Inc. Employees Profit Sharing Plan and Trust Agreement, 234 F.3d 873 (5th Cir. 2000); Internal Revenue Manual (IRM) §4.10.11.2.1.1(3)).
A timely filed informal refund claim will toll the statute of limitation until the taxpayer can properly file a formal refund request (Pala, 234 F.3d at 880). To be valid, an informal claim must apprise the IRS that a refund is sought, inform the IRS with enough particularity of the tax and year at issue to allow it to investigate, describe the refund’s legal and factual basis, and include a written component (id.; AmBase Corp., 731 F.3d 109 (2d Cir. 2013)). Additionally, the defects in the informal claim must later be remedied by a formal amendment to the timely informal refund claim (see Pala, 234 F.3d at 880 (the informal claim doctrine is “predicated on an expectation that these formal deficiencies will at some point be corrected”)). One type of informal refund claim is a protective claim (see AmBase Corp., 731 F.3d at 118 (“As a type of informal claim, taxpayers may file ‘protective claims,’ which ‘preserve the taxpayers’ right to claim a refund when the taxpayers’ right to the refund is contingent on future events and may not be determinable until after the statute of limitations expires’ ”) (citing IRS Chief Counsel Advice (CCA) 200848045; see also CCA 200547011)).
Protective claims generally
A protective refund claim suspends the refund statute of limitation until the taxpayer can file a complete refund claim after the occurrence of the contingency (see CCA 201136021 (“a valid protective claim contains a present claim that the Service may immediately allow or disallow once the contingency is resolved”)).
Neither the Code nor Treasury regulations mention protective refund claims, but the Supreme Court has established the right of taxpayers to file such a claim, and the IRS has recognized the practice. See Kales, 314 U.S. 186 (1941), holding that a refund claim was sufficient even though written in future tense (e.g., “will claim”) and was contingent on a future event. See also IRM Section 21.5.3.2(1), defining a refund claim as “a request for refund, or a request for an adjustment of tax paid or credit not previously reported or allowed. This includes protective claims and requests for abatement of interest/penalty.” Protective claims filed with the IRS are generally put into suspense status, meaning that no action is taken on the protective claim until the contingency is resolved (IRM §4.10.11.2.1.3).
Form of protective refund claim
To be a valid protective refund claim, the claim must still comply with the specificity requirement in Regs. Sec. 301.6402-2. That is, the protective claim must (1) have a written component; (2) identify and describe the contingencies affecting the claim; (3) be sufficiently clear and definitive to alert the IRS to the essential nature of the claim; and (4) identify the specific year or years for which a refund is sought (CCA 201136021). The protective refund claim does not need to state a particular dollar amount or demand an immediate refund (id.). Once the contingency is resolved, the taxpayer must perfect the protective refund claim by filing a formal claim for refund. See Commercial National Bank of Peoria, 874 F.2d 1165, 1170 (7th Cir. 1989) (“[U]nder certain special circumstances a timely ‘informal’ refund claim may serve to toll the statute of limitations until the taxpayers properly can file a formal refund request.”).
IRM Section 21.5.3.4.7.3(2) states, “A protective claim will be identified with a literal ‘protective claim’ or similar language or verbiage related to current regulation or pending or current litigation on the claim itself.” However, just because a taxpayer writes “protective claim” on its Form 1120-X, Amended U.S. Corporation Income Tax Return, does not make the form a valid protective claim. See CCA 201136021 (“A claim cannot be viewed as a protective claim merely because a taxpayer labels it as such.”).
Critically, a taxpayer must perfect a protective claim once the contingency has been resolved (see Pala, 234 F.3d at 880 (holding that the informal-claim doctrine is “predicated on an expectation that these formal deficiencies will at some point be corrected”)). That is, following the occurrence of the contingency, a taxpayer must amend a protective refund claim to include the specific dollar amount requested.
Taxpayers with partnership years subject to the TEFRA audit regime need to also consider the deadline to petition for a court redetermination. Under TEFRA, a partnership must petition a court for a refund within two years of filing its administrative adjustment request (AAR) (former Sec. 6228(a)(2)). If the IRS does not consent to extend the refund statute of limitation, the partnership and its partners will need to file a court petition to preserve their refund claim within two years of the filing of the protective AAR.
Reasons for refund claims
IRM Section 21.5.3.4.7.3(1) notes that protective claims are “normally” based on expected changes in current regulations, pending legislation, or current litigation. However, taxpayers also frequently file protective refund claims while waiting for determinations from the IRS or (as discussed below) from other taxing authorities. See Pala, 234 F.3d at 880 (noting that the taxpayer could have filed a protective claim while the IRS considered a request for a determination that a plan was qualified as a tax-exempt profit sharing plan); see also Rev. Proc. 2015-40, Section 11 (noting that taxpayers may file protective claims when seeking assistance from the U.S. competent authority).
Contingency vs. reserving right: To be valid, a protective refund claim must actually be contingent on a future event — a taxpayer cannot file a protective refund claim merely to reserve its right to make a refund claim in the future (see CCA 201136021 (concluding a claim was not a valid refund claim because it did not contain “a claim that is contingent” but merely informed the IRS that the taxpayer wanted “to reserve the right to make a claim in the future”)). It is unclear whether a “contingency” that is within the control of a taxpayer is grounds for a protective claim.
In Field Service Advice (FSA) 392, the IRS said courts have accepted protective refund claims when “the taxpayer merely needed additional time to provide exact data.” However, both cases cited by the FSA involve unique circumstances. In one case, shortly before the refund statute of limitation expired, the taxpayer discovered that his longtime bookkeeper may have been embezzling from him and that his tax returns may have been incorrect (Cochran, 62 F. Supp. 872 (Ct. Cl. 1945)).
The taxpayer filed a protective refund claim saying he would furnish the “exact data” relating to his refund claim after his books were audited and the extent of the bookkeeper’s misconduct discovered. The court held that the informal claim, later perfected, was sufficient to toll the refund statute of limitation.
In the other case, the taxpayer filed a protective refund suit stating that she believed her deceased husband had paid a tax in 1948 that was also paid by his estate in 1954 (Caswell, 190 F. Supp. 591 (N.D. Cal. 1960)). In the refund claim, the taxpayer said she was filing a protective claim to allow more time to look for proof of payment. Again, the court held the protective refund claim to be sufficient.
Foreign tax credit redeterminations: One common reason for protective refund claims involves the foreign tax credit. Under Sec. 901(a), taxpayers are allowed a credit for foreign taxes paid. However, taxpayers can claim foreign tax credits only within 10 years of the due date for filing the return for the year in which the tax was paid or accrued (Sec. 6511(d)(3)(A)). It is critical that taxpayers note that this period runs from the unextended due date of the return for the year to which the taxes relate (Regs. Sec. 301.6511(d)-3(a)). So, although 10 years may seem like a long time to claim a refund, it may in fact be relatively short, considering how long foreign audits may take to resolve.
Example: In 2022, a foreign tax authority audits a corporation’s 2018 taxes. The audit concludes in 2025, but the corporation disputes the audit and litigates the issue in the foreign courts. In 2030, the litigation is resolved, and the taxpayer owes an additional $3 million in foreign taxes. The corporation cannot amend its 2018 return to take a credit for those additional foreign taxes, unless it had filed a protective claim.
Accordingly, taxpayers involved in foreign tax audits should consider filing protective refund claims with the IRS with respect to the potential future payment of foreign taxes for the year at issue. (See also an Office of Chief Counsel memo, Legal Advice Issued by Field Attorneys (LAFA) 20125202F, concluding that a taxpayer filed a valid protective claim pending the resolution of a foreign tax dispute on the withholding taxes of constructive dividends.)
If the taxpayer is working with the U.S. competent authority to resolve the foreign tax dispute through the mutual agreement procedures (MAP), the IRS instructs taxpayers to file protective refund claims: “A taxpayer may make a protective claim to protect its right to a potential credit or refund in the event that a competent authority resolution is reached and to retain its rights of access to any alternative remedies available outside of the competent authority process under the Code or regulations” (Rev. Proc. 2015-40, §11.02(1)). The revenue procedure states that, generally, taxpayers should file the protective claim when they have “reason to believe that an action of a tax authority has resulted or is likely to result in a competent authority issue” (id., §11.02(2)).
To file the protective refund claim, the taxpayer can either include the claim with the MAP request or file a letter stating that the claim is being made pursuant to Rev. Proc. 2015-40 in relation to an issue on which the taxpayer may request competent authority assistance (id., §11.03(1)). Like all refund claims, the protective refund claim must satisfy the requirements of Sec. 6402 and Regs. Sec. 301.6402-3; i.e., it must “(a) fully advise the IRS of the grounds on which the credit or refund is claimed, (b) contain sufficient facts to apprise the IRS of the exact basis of the claim, (c) describe and identify the contingencies affecting the claim, (d) state the year for which the claim is being made, (e) be verified by written declaration made under penalties of perjury, and (f) be filed before the expiration of the applicable period of limitation to which the claim relates” (id., §11.02(3)).
Analyze the facts and circumstances
Taxpayers with contingent refund claims should consider filing protective refund claims before the refund statute of limitation expires. Although protective claims do not require a dollar amount or immediate demand for refund, they should still comply with the regulatory requirements for refund claims (e.g., the specificity requirement). In addition, taxpayers should amend their protective refund claims as soon as practical after the contingency is resolved.
Editor Notes
Alexander J. Brosseau, J.D., CPA, is a senior manager in the Tax Policy Group of Deloitte Tax LLP’s Washington National Tax office.Unless otherwise noted, contributors are members of or associated with Deloitte Tax LLP. For additional information about these items, contact Mr. Brosseau at 202-661-4532 or abrosseau@deloitte.com.
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