National Taxpayer Advocate (NTA) Erin Collins recommended that the IRS temporarily postpone the two-year time limit for taxpayers to file a lawsuit to contest the Service's disallowance of a claim for refund or credit and allow more time to resolve such disputes administratively with the IRS.
Collins included the recommendation in her NTA Blog entry posted Wednesday that also warned taxpayers and their representatives that the time limit applies regardless of whether the taxpayer is pursuing an administrative appeal. Taxpayers may mistakenly believe that disputing a claim disallowance extends the time for its consideration, she wrote.
However, Collins emphasized, Sec. 6514(a)(2) prohibits paying a refund or allowing a credit more than two years from the date the IRS notifies the taxpayer of its disallowance of all or part of the claim (or the taxpayer waives the right to a notice). Also, after that time, under Sec. 6532(a)(1), no lawsuit or proceeding may be initiated, either. Generally, such proceedings may be filed only in a U.S. district court or the Court of Federal Claims.
Taxpayers are more likely in recent years to fall afoul of the limitation period as the IRS struggles to contend with backlogged correspondence and returns, Collins said.
"The backlog and other delays caused by the pandemic have made it challenging for the IRS to process a taxpayer's dispute to a notice of claim disallowance within the two-year period," she wrote. "With the delays in processing correspondence, these protests may sit for many, many months before being addressed."
The Service has mailed hundreds of thousands of Letters 105C, Claim Disallowed, and 106C, Claim Partially Disallowed, the usual notification of denial that starts the clock, in each of the past three calendar years. "The delays in processing and moving a dispute through the Appeals process to finality, potentially exceeding the period under IRC § 6532, could affect thousands of taxpayers," Collins wrote.
Short of the recommended relief's being granted, the only remedy, she said, is for taxpayers to properly execute with the IRS before the expiration of the two-year period Form 907, Agreement to Extend the Time to Bring Suit, which activates the provision under Sec. 6532(a)(2) to allow an extension of time to bring a lawsuit or proceeding, as well as extending the time in which the Service can administratively process the claim.
But most taxpayers — and many practitioners — are unfamiliar with Form 907, Collins said. They also may not know that, absent executing it, taxpayers' ability to receive the sought credit or refund expires by law at the end of the two-year period.
The IRS should exercise its authority under Sec. 7508A to postpone the two-year period for filing a refund suit in a U.S. district court or the Court of Federal Claims for up to one year, for all notices of claim disallowance mailed within the past two years, Collins wrote.
There is precedent, she wrote, for such an exercise of the IRS's authority: The Service used it to postpone the return filing and payment deadlines for the 2020 and 2021 tax filing seasons. Both times, the IRS invoked Sec. 7508A(a)'s applicability to any taxpayer affected by a federally declared disaster (as defined by Sec. 165(i)(5)(A)), specifically, the ongoing COVID-19 pandemic.
A postponement could also help alleviate crowded court dockets and conserve resources for the IRS's Office of Chief Counsel, as taxpayers are less likely to file a protective lawsuit as the two-year deadline approaches, Collins wrote.
The IRS should also do more to educate taxpayers and its own Appeals officers, revenue agents, and tax examiners on the benefits and consequences of executing Form 907, Collins said. Other procedural measures to protect taxpayers' rights include improving the form by establishing a dedicated address, fax line — or, ideally at some point, a web portal — for submitting it. The form currently lacks any indication of where taxpayers should send it if no IRS agent or Appeals officer has been assigned, she noted.
In addition, the IRS could make its notice of claim disallowance clearer, Collins said, citing a 2014 NTA Annual Report to Congress section on one of the most serious problems facing taxpayers: that "refund disallowances do not provide adequate explanations" of the reason or reasons for a disallowance.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.