Refund dead ends: Statute-of-limitation considerations

Tax practitioners often represent clients needing to request a federal tax refund. Most practitioners understand that for a client to qualify for a credit or refund, they must file a claim within three years of filing the return or within two years from when the tax was paid, whichever expires later (Sec. 6511(a)). The length of time the IRS takes to process a refund claim and render a decision can vary greatly and has increased in recent years following the COVID–19 pandemic.

Additional deadlines must be met to preserve administrative appeal rights within the IRS and eligibility to file a refund suit if the IRS ultimately disagrees or fails to timely respond to the refund claim. This column surveys these deadlines and provides practical tips for ensuring that a client’s refund does not run into a dead end.

Properly filing a refund claim: The variance doctrine and protective claims

While this column focuses on preserving appeal and suit rights following the denial of a refund claim, the initial refund claim needs to be carefully prepared and timely filed. Under the variance doctrine, a taxpayer may not sue the United States for a refund unless the refund claim itself was filed in compliance with Sec. 7422 and the accompanying regulations, which require the taxpayer to detail each ground upon which a refund is claimed (see Regs. Sec. 301.6402–2(b)(1): “The claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof”). For instance, if a taxpayer files a refund claim but does not specifically raise an issue such as additions to tax or a specific interest issue, the government may file a motion to dismiss the case or limit the issues in any refund suit the taxpayer files. Similarly, the refund claim should address each element necessary to obtain the refund and consider requirements set forth in the Treasury regulations.

To be sure, the information, documentation, and detail required vary depending on the type of refund claim, and practitioners should pay careful attention to regulations and published guidance relevant to the taxpayer’s refund claim. For example, the documentation requirements for claims made concerning the credit for increasing research activities are extensively spelled out (IRS News Releases IR–2024–171 (June 21, 2024) and IR–2024–313 (Dec. 20, 2024)).

In sum, refund claims should clearly identify all bases of the claim as well as the necessary facts and substantiation required by applicable Treasury regulations. Failing to do so can have fatal consequences for a taxpayer’s claim for refund. For example, in Leopard, No. 25–329 (Fed. Cl. 10/2/25), failure to provide supporting documentation with a refund claim resulted in the dismissal of a suit for refund because the refund claim was not “duly filed,” as it was “devoid of the necessary supporting documentation.” Likewise, courts have recently dismissed suits for refund that varied from the grounds in the claims for refund (e.g., Shleifer, No. 24–CV–80713 (S.D. Fla. 6/9/25) (dismissing the refund suit because a claim for depreciation deduction was made on an amended Form 1040, U.S. Individual Income Tax Return, Schedule C, Profit or Loss From Business (Sole Proprietorship), instead of Schedule E, Supplemental Income and Loss, upon which the taxpayer’s argument relied); Trail King Industries, No. 4:24–cv–04164 (D. S.D. 7/24/25) (dismissing claims, including that Treasury regulations were invalid, from the refund suit because the claims were not raised in the taxpayer’s administrative claim for refund)).

Tax advisers should also be cognizant of situations where a refund claim may hinge on an IRS or court determination for another tax period. For instance, if a taxpayer is claiming a particular bad–debt deduction in one year but the IRS could assert the deduction should have been in the next year, the taxpayer should consider filing a protective refund claim for the second year, even though the mitigation provisions in Secs. 1311–1314 may arguably apply (see Cooper, Berman, and Abney, “Protecting Contingent Refund Claims,” 54–3 The Tax Adviser 26 (March 2023)).

Filing a protective claim for refund to preserve issues in other tax years protects the taxpayer’s claim for refund. It also protects the taxpayer’s adviser. A tax adviser does not want to be facing a potential malpractice claim where, having failed to make a protective refund claim, they need to argue that the statute of limitation is open because, arguably, an informal refund claim was made or because other relief is available, such as the mitigation provisions, or there are equitable remedies, such as equitable recoupment.

Administrative IRS appeal

When taxpayers’ refund claims are disallowed or denied, the IRS sends a denial letter, typically a Letter 105–C (or a Letter 106–C in the case of a partial denial) to inform taxpayers of the denial, the administrative appeals process, and the time frame in which they can file a suit contesting the denial in federal district court or the Court of Federal Claims. For an administrative appeal of a claim over $25,000, a formal written protest must be prepared and sent to the IRS at the address in the denial letter the taxpayer received. For claims under $25,000, a small–dollar case request can be made rather than a formal written protest. A taxpayer generally should file the appeal within 30 days of receiving the letter to protect the taxpayer’s appeals rights.

As an example, the Letter 105–C for an employee retention credit (ERC) claim denial describes how there is a two–year period from the date of the notice of claim disallowance to file suit. Recent versions of this letter include a link to an IRS website, which clarifies that an administrative appeal within the IRS can be requested within two years from the date of disallowance (the date on Letter 105–C), but the IRS recommends requesting an appeal early (within 30 days of receiving a Letter 105–C) to protect the two–year timeline that taxpayers have to request an appeal or file suit (see IRS webpage “Understanding Letter 105–C, Disallowance of the Employee Retention Credit,” also “Did You Receive a Notice of Claim Disallowance for Your Employee Retention Credit Refund Claim? If So, Now What?“ NTA Blog, Taxpayer Advocate Service (Aug. 21, 2024)).

Consistent with the IRS’s guidance for the ERC Letter 105–C, practitioners should consider filing an appeal early in the appeals period for all refund claims to permit time to resolve issues through the administrative process. Taxpayers have two years from the date of Letter 105–C or 106–C to file suit with the district court that has jurisdiction or with the Court of Federal Claims to contest the disallowance (Sec. 6532(a)). Importantly, the administrative appeals process for claims is separate from the two–year timeline that taxpayers have to file suit. Requesting an appeal or receiving an appeal decision does not change the two–year limitation on eligibility to file a refund suit. However, it may be possible to agree to an extension of the two–year statute of limitation for filing suit using Form 907, Agreement to Extend the Time to Bring Suit.

Without reading the language of Letter 105–C closely, a practitioner reviewing a client’s disallowed claim may mistakenly believe that requesting an appeal would extend or pause their two–year eligibility to file suit. However, requesting an appeal does not change the eligibility window to file suit, and even receiving a favorable appeal decision does not affect the eligibility window (assuming that the refund from the favorable decision was not paid). Indeed, if denied claims are not contested within the two–year limitation, they are considered erroneous and void (Sec. 6514(a): “A refund of any portion of an internal revenue tax shall be considered erroneous and a credit of any such portion shall be considered void … (2) In the case of a claim filed within the proper time and disallowed by the Secretary, if the credit or refund was made after the expiration of the period of limitation for filing suit, unless within such period suit was begun by the taxpayer”).

Another consideration is that if the taxpayer files suit, the IRS Independent Office of Appeals (Appeals) will not have jurisdiction because the case would be referred to the Department of Justice (DOJ) for defense, and under Sec. 7122, sole settlement authority would rest with the DOJ. Accordingly, if a taxpayer wants to continue to pursue a refund claim with Appeals, a Form 907 should be filed to extend the statute of limitation to file a refund suit, allowing the taxpayer to continue in Appeals but also preserving the right to pursue a suit for refund in a district court or Court of Federal Claims.

Appeals considers hazards of litigation in resolving cases. An implication of this two–year limitation expiring is that, despite the strength of the merits of the case, the hazards for the government may become zero. Thus, an important dynamic in Appeals or at any procedural step for resolving an issue is that the taxpayer needs to preserve a subsequent appeal or potential to file a suit. Otherwise, the IRS Appeals officer (and manager) will effectively become the final arbiter of the issue with additional leverage in the settlement discussions. Indeed, as explained above, the plain text of Sec. 6514(a) prevents Appeals or any division of the IRS from allowing a refund after the expiration of the period in which the taxpayer must file suit for the refund (see also Chief Counsel Advice 201110011, Oct. 28, 2010; “Notice of Claim Disallowance: Don’t Make This Mistake,” NTA Blog (Feb. 8, 2024)). Accordingly, tax practitioners must remain vigilant to guard against expiration of the two–year statute of limitation to file suit in order for the taxpayer to obtain a refund, whether administratively or through litigation.

Litigation considerations

To optimize the ability to resolve issues administratively, nonlitigators need to be aware of other statutory timelines for a potential lawsuit. For instance, a taxpayer may not file a refund suit for a claim before six months after the claim is filed, unless the IRS has rendered a decision on the claim within that time (Sec. 6532(a)(1)). It has been well publicized, including by the national taxpayer advocate, that the Service’s backlog and other delays caused by the pandemic have caused delays in processing refund claims (see Heroux and Thao, “Systemic Delays by the IRS in Processing Forms,” 54–10 The Tax Adviser 42 (October 2023); Taxpayer Advocate Service, National Taxpayer Advocate Annual Report to Congress, 2023, p.5). Practitioners should weigh the ability to get timely and meaningful consideration and resolution administratively, based on the facts of each case, when deciding whether to pursue litigation.

An additional timeline consideration occurs when the IRS renders no decision on a refund claim and sends no notice of disallowance. Courts have long held, and the IRS explicitly agrees in the Internal Revenue Manual (IRM), that there is no limitation period for bringing suit if no notice of disallowance has been sent (seeIRM §34.5.2.2). However, it has been suggested that taxpayers may face a six–year limitation to file suit pursuant to the general six–year statute of limitation for claims against the government (28 U.S.C. §2401), beginning when the right of action accrues six months after a refund claim is filed (see Hale, 143 Fed. Cl. 180, 187 n.5 (2019)). Accordingly, a careful tax practitioner should also consider calendaring and filing suit prior to the six–year mark while nevertheless maintaining the position that there is no statute of limitation for a refund suit when the IRS fails to disallow a claim.

Considering the authorities above, tax practitioners representing clients with refund claims are faced with something of a “Goldilocks and the Three Bears” dilemma in determining whether the time to resolve an issue is too early, too late, or just right. By closely tracking the applicable timelines, practitioners can preserve administrative options while maintaining the ability to pursue a refund suit if necessary and so avoid refund dead ends.

Contributors

Cory Stigile, CPA, J.D., LL.M., is a principal; Melissa Briggs, J.D., is also a principal; and Hunter Keaster is a former law clerk, all with Hochman Salkin Toscher Perez PC in Beverly Hills, Calif. Stigile is also a member of the AICPA Tax Executive Committee. For more information about this column, contact thetaxadviser@aicpa.org.