Sometimes a situation arises when a taxpayer overpays his or her taxes for a particular year. When a taxpayer overpays his or her taxes, he or she can file a Claim for Refund to recover the amount of the overpayment. One common example of a Claim for Refund is when a taxpayer files his or her annual income tax return for a year in which too much tax was withheld. The IRS will then issue the taxpayer a refund for the amount of the overpayment.

Timing is critical when asking the IRS to refund any tax overpayment. A taxpayer must file a Claim for Refund with the IRS within 3 years of the actual filing date of the tax return or within 2 years of the actual tax payment, whichever is later. Any refunds sought after these time periods are considered time barred, unless special circumstances exist.

The IRS requires different procedures for filing a Claim for Refund. These procedures are based on the underlying reason for the overpayment. One way is to amend an original tax return to reflect the recalculated amounts and show the IRS the amount of the overpayment. A common example where a taxpayer would file an amended return to recover a refund is when a business taxpayer incurs a net operating loss in the current year. By operation of the law, the taxpayer is entitled to carry that net operating loss back, up to two years. Depending on the circumstances, the amended returns showing the loss carryback may entitle the taxpayer to a refund.

Another way to submit a Claim for Refund is to file Form 843, Claim for Refund and Request for Abatement. When completing this form, the taxpayer must be certain to clearly identify the legal grounds on which her or she is relying to recover the overpayment. The Form 843 is typically used when the taxpayer is seeking a refund of any amount paid to the IRS as result of an IRS audit examination. A taxpayer should also use this form when seeking to recover amounts paid pursuant to an installment payment plan. If a taxpayer has made many payments toward a tax obligation, he or she may be required to file more than one Form 843 for each payment. When making claims for refund for installment payments, the IRS will not consider the merits of the claim until the obligation is paid in full.

In most cases, the IRS will also accept an “informal” Claim for Refund. An informal Claim for Refund is simply a letter to the IRS stating that the taxpayer is seeking a refund of a particular amount for the specified reason. Taxpayers must be careful when submitting an informal Claim for Refund as the IRS will only accept an informal Claim for Refund if the letter sufficiently notifies the IRS of the basis for the claim and the amount of the claim. These types of Claims for Refund are not appropriate in most circumstances and are reserved for very specific situations.

Sometimes future events or contingencies, like proposed changes in the tax law, may affect whether a taxpayer overpaid his or her taxes for a particular year. If the time limit for filing a Claim for Refund is approaching, the taxpayer may file a protective Claim for Refund to preserve the right to recover the specified amount. The protective Claim for Refund puts the IRS on notice that the taxpayer may have a right to make a Claim for Refund when the future event or contingency occurs.

Due to the large number of frivolous Claims for Refund the IRS receives each year, Congress enacted a provision that penalizes taxpayers who file a Claim for Refund for an excessive amount. I.R.C. § 6676. The penalty is equal to 20% of the amount of the claim that is considered excessive. To avoid having a claimed amount be considered excessive, the taxpayer must present a reasonable basis for the Claim for Refund amount. Taxpayers should consider consulting with a tax professional before making a Claim for Refund to ensure that their claim is not for an excessive amount.

If a taxpayer files a Claim for Refund, and the IRS denies the refund, then the taxpayer may appeal that denial to the IRS Appeals Office. If the taxpayer does not appeal the Claim for Refund or the Appeals Office rejects the claim, the IRS will issue a statutory notice of claim disallowance. The taxpayer then has 2 years from the date of the statutory notice of claim disallowance to file a suit for refund with the either the United States Court of Federal Claims or the United States District Court retaining jurisdiction.

One trap practitioners must be aware of when filing a Claim for Refund on behalf of a taxpayer is that the United States Court of Federal Claims and the United State District Court are limited to the evidence provided to the IRS when reviewing the merits of any particular Claim for Refund. Thus, the practitioner must be sure to put the IRS on notice of all possible arguments for recovering the overpayment, or when the taxpayer files suit, he or she will be deemed to have waived any arguments or evidence that were not presented to the IRS in the initial Claim for Refund.

Taxpayers who believe they overpaid their taxes in a particular year should consult a tax practitioner to discuss whether it is appropriate to file a Claim for Refund.