The Elastic Statute of Limitations on Claims for Refund

In Brief

Tax professionals have traditionally cited the statute of limitations on claims for refund to be the later of two years from the date of payment or three years from the date of filing based on the plain language of IRC section 6511. The author offers insights into the interplay of subsections (a) and (b) of section 6511, which causes a paradoxical scenario that has puzzled the courts for decades. After the IRS’s loss in Weisbart v. U.S., recently revised Treasury Regulations indicate the IRS will reconsider all claims for refund previously disallowed on grounds similar to those in Weisbart, no matter how old.

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The IRS issued 120 million individual income tax refunds in fiscal year 2017. Individual income tax refunds made up more than 98% of all refunds issued and almost 88% of all tax dollars refunded. That same year, almost 21% of all individual income tax collected was eventually refunded (IRS Data Book). A review of the last 10 years’ worth of data released by the IRS indicates that these figures have reamined constant. Each year, a substantial portion—more than 20%—of individual income tax collected is refunded, and individual income tax refunds make up the vast majority of all refunds, both by count and dollars (Exhibits 1 and 2).

In general terms, claims for refund are premised on the three requirements set forth in Internal Revenue Code (IRC) section 6511:

• There is an overpayment.
• The claim is timely filed.
• All or part of the overpayment falls within an applicable lookback period.

With respect to the first requirement, Congress did not define “overpayment,” but limited itself to providing some examples. IRC section 6401 treats as overpayment any taxes collected after the expiration of the statute of limitations, refundable tax credits in excess of the tax liability, and any amount collected in cases where the taxpayer does not have a tax liability. The first attempt to define the term “overpayment” comes from Jones v. Liberty Glass Co. [332 U.S. 524, 68 S.Ct. 229, 92 L.Ed. 142 (1947)], where the Supreme Court “read the word ‘overpayment’ in its usual sense, as meaning any payment in excess of that which is properly due.” This working definition was reaffirmed by the Supreme Court in 1990 when it stated that “the commonsense interpretation is that a tax is overpaid when a taxpayer pays more than is owed, for whatever reason or no reason at all” [U.S. v. Dalm, 494 U.S. 596, 609, 110 S.Ct. 1361, 108 L.Ed.2d 548 (1990)].

The second requirement, that the claim be timely filed, is imposed by IRC section 6511(a), which provides that a claim for refund of an overpayment of any tax must be filed “within three years from the time the return was filed or two years from the time the tax was paid, whichever of such periods expires the later.”

The third requirement, the lookback period, is determined with reference to IRC section 6511(b), which sets two different lookback periods:

• In the case of claims for refund filed within two years from the time the tax was paid, the amount refundable cannot exceed the portion of the tax paid in the two years immediately preceding the claim [section 6511(b)(2)(B)].
• In the case of claims for refund filed within three years from the time the return was filed, the amount refundable cannot exceed “the portion of the tax 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” [section 6511(b)(2)(A)].

The second and third requirements are at the heart of this article, as the intersection of subsections (a) and (b) can present a paradoxical scenario. The paradox stems from the plain language of section 6511, which determines the time-liness of a claim for refund with reference to an earlier payment or an earlier return; the Treasury Regulations, however, provide that an original return is itself a claim where it shows an overpayment [section 301.6402-3(a)(5)]. Therefore, a genuine issue of timeliness arises when a claim for refund is embedded in an original delinquent return (i.e., any original return filed after the date prescribed by IRC section 6072). In these cases, is the claim timely on its face because the return and the claim are filed at the same time, or is the timeliness of the claim determined solely by reference to the date that falls two years after the most recent payment, since no earlier return was filed? Or could there be a paradox whereby the claim, benefitting from the mailbox rule (discussed below), is deemed filed before the delinquent return, not itself eligible for the mailbox rule? Since 1976, the IRS and the courts have changed their views on these questions multiple times.

1976: Revenue Ruling 76-511

In 1976, the IRS issued Revenue Ruling 76-511, making it the first piece of administrative guidance on this point. The hypothetical timeline in this revenue ruling (Exhibit 3) provided that a taxpayer did not file a timely 1972 income tax return, but instead filed an original return that embedded a claim three years and 15 days after the original due date of the return. The claim stemmed from income tax withholdings during 1972, which were deemed paid on April 15 of the following year under IRC section 6513(b)(1).

The revenue ruling concluded that the claim was timely filed since the original return and the claim were filed together as the same document, and therefore the three-year requirement of section 6511(a) was met on its face. The lookback period under section 6511(b), however, extended only three years from the date the claim was filed, and therefore no portion of the overpayment was refundable. In sum, while the claim was timely filed, the refundable amount was nil.

Revenue Ruling 76-511 was a simplistic attempt at guidance that left more questions unanswered than answered. It did not address, for example, the effects of an extension of time to file (per IRC section 6081) to the lookback period, nor the applicability of the mailbox rule. In fact, the revenue ruling postulated, somewhat naively, that the original return embedding the claim was filed on April 30, 1976, without mention or regard to the date of mailing and the date of receipt.

1980: King v. U.S.

The questions unanswered by the 1976 revenue ruling surfaced soon thereafter in King v. U.S. [495 F.Supp. 334 (D. Neb. 1980)]. In King, the taxpayer claimed a refund of overpaid 1973 taxes. The claim was made on a delinquent original return mailed on April 15, 1977, and received by the IRS on April 20, 1977. With respect to the timeliness of the claim, the King court found that the claim was filed on time since it was filed along with the original return and therefore met the three-year rule on its face. The more difficult question in King was the application of the lookback period and whether it would start on the date of mailing or the date of receipt. The pivotal issue, therefore, was the applicability of the mailbox rule to claims for refund embedded in original delinquent returns.

In relevant part, IRC section 7502(a), commonly referred to as the “mailbox rule,” provides that “if any return, claim, statement or other document required to be filed … within a prescribed period” is mailed on or before the respective due date, “the date of the United States postmark stamped on the cover … shall be deemed to be the date of delivery.” The application of the mailbox rule rests on the due date of the document being filed [Treasury Regulations section 301.7502-1(a)]. In other words, if a tax return is deposited in the U.S. mail, the due date of that return will control whether the mailbox rule can be invoked because the postmark date must fall on or before that return’s due date.

The peculiar issue in King was the existence of a bivalent filing: a single document serving both as original return and claim for refund. To the extent the court would consider the document an original return, the mailbox rule would not apply, as the postmark date fell long after the return’s original due date; however, to the extent the court would consider the document a claim for refund, the mailbox rule would apply. The King court resolved this issue by treating the document primarily as an original return not eligible to claim the benefits of the mailbox rule and therefore filed on April 20, 1977, the date of receipt. The claim, filed along with the return as one document, was also considered filed on the date of receipt. Under these circumstances, the lookback period did not extend sufficiently backward to allow any portion of the overpayment to be refundable, as shown in Exhibit 4.

Both King and Revenue Ruling 76-511 concluded that a claim for refund embedded in an original delinquent return was timely filed on its face under the “one-document rule.” King, however, provided the first precedent with respect to the applicability of the mailbox rule, holding that the document being filed was in principle a delinquent return, albeit embedding a claim for refund, and therefore not eligible for the mailbox rule. Neither King nor Revenue Ruling 76-511, however, addressed the effects of an extension of time to file to the lookback period.

1981: IRS General Counsel Memorandum 38665

Rather than following King, the IRS issued General Counsel Memorandum (GCM) 38665, asserting that the court “misinterpreted the regulation’s clear meaning.” The IRS opined, “We do not believe that a claim for refund filing date is necessarily the same as the tax return filing date, even if both the claim and the return are filed on a single Form 1040.” This position was based on the then-proposed changes to the section 7502 regulations, which have since been revised again and incorporated in Treasury Regulations section 301.7502-1.

GCM 38665 was the first piece of administrative guidance departing from the one-document rule, thus creating the fiction that a single filing could bear two filing dates: one as an original return, based on date of receipt, and the other as a claim for refund, based on the date of mailing. The filing date of the claim therefore would precede that of the return. This left a new unanswered question: because the timeliness of a claim for refund under IRC section 6511(a) is ascertained with respect to either an earlier payment or an earlier return, and because no earlier return exists when a claim is filed before the return, is the timeliness then determined based solely on the date that falls two years after the most recent payment? If so, the very same claim for refund disallowed in King would still be disallowed, although this time for want of timely filing and not because of the lookback period. This would become the IRS’s official position on this point for the next 19 years.

1996: Porter v. U.S.

Porter v. U.S. [919 F.Supp. 927 (E.D.Va. 1996)] added an important piece to the puzzle: the effects of an extension of time to file to the lookback period. While the plain language of section 6511(b)(2) stretches the lookback period by any extension of time to file granted, it is silent as to whether the extended lookback period applies even when the return was filed after the extended due date. In other words, could a taxpayer benefit from the extended lookback period even when the taxpayer did not make use of the filing extension?

In Porter, the taxpayer secured a six-month extension of time to file his 1987 income tax return. The taxpayer did not make use of this extension, but instead filed his tax return on March 1, 1993, approximately 4½ years after the extended due date. The late return embedded a claim for refund of $12,767. As the court stated:

Based on the plain language of the statute and an earlier 1985 decision by the 10th Circuit Court of Appeals [Weigand v. U.S., 760 F.2d 1072 (10th Cir., 1985)], the Porter court applied a 3½-year lookback period. Effectively, the court read the statute based on its plain meaning: that the lookback period would be lengthened by any extension of time to file, regardless of whether the return was filed by the extended due date.

2000: The IRS Concedes

At the end of a busy year in 2000, the IRS conceded defeat on this topic once and for all. In May, the IRS issued Field Service Advisory (FSA) 200021010, in which it reasserted its position that the mailbox rule does not apply to delinquent returns embedding a claim for refund. The premise of FSA 200021010 was that under IRC section 6511(a), claims for refund had to be filed with reference to an earlier payment or an earlier return. In the absence of a return, the taxpayer could either file a claim within two years of the earlier payment or first file a return and then take advantage of the three-year period to file a claim. Therefore, where a claim and a delinquent return were filed in the same document, the document would be treated primarily as a delinquent return not eligible for the mailbox rule. In all such cases, the IRS opined, the filing date for both the return and the claim would therefore be the date of receipt, not the date of mailing.

The IRS defended its position on this issue on two fronts within weeks from one another. Although the first of the two cases to be argued was Anastasoff v. U.S. [223 F.3d 898 (8th Cir. 2000)], the first of the two opinions to be published was Weisbart v. U.S. [222 F.3rd 93 (2nd Cir. 2000)]. Both cases revolved around the application of the mailbox rule to delinquent returns embedding a claim for refund, and the two courts reached opposite conclusions.

The IRS’s arguments persuaded the Anastasoff court, which published its opinion in August 2000. The court agreed that:

Therefore, the Anastasoff court did not apply the mailbox rule and essentially followed the IRS’s position that the filing date for both aspects of the document (i.e., claim and delinquent return) was the date of receipt.

While the Anastasoff court was preparing to publish its opinion, the Weisbart court heard and decided a substantially similar case, with a vastly different outcome, publishing its opinion one month ahead of Anastasoff. In Weisbart, the taxpayer obtained a four-month extension of time to file his 1991 tax return. The tax return, which embedded a claim, was eventually mailed on August 17, 1995, and received by the IRS four days after. The Weisbart court defined the same IRS position that persuaded the Anastasoff court as “arabesque” and instead held that the joint document (return and claim) was primarily a claim eligible for the mailbox rule and therefore deemed filed on its postmark date. The timeline per this decision is shown in Exhibit 5.

Of particular interest is why the Weisbart court held that the joint document was primarily a claim eligible for the mailbox rule. The court determined that the mailbox rule applied because the date of mailing was within 3 years of the date of payment:

To grasp the fallacy of the Weisbart reasoning, it is useful to return to the basics of IRC section 6511. Subparagraph (a) contains a timeliness requirement that dictates whether a claim is timely filed. Subparagraph (b) contains a separate and distinct—but overlapping—quantitative limitation as to how much of the over-payment may be refundable. The Weisbart court was called to decide the timeliness issue stemming from subpara-graph (a), which effectively rested on the applicability of the mailbox rule. The court held that “because that date is within three years of the date when Weisbart is deemed to have paid his withheld employment taxes, he may recover any overpayment included in those taxes under the lookback provisions of section 6511(b)(2)(A).” In other words, the Weisbart court held that because the claim had met the requirements of sub-paragraph (b), it necessarily met the requirements of subparagraph (a).

This argument is circular. The look-back period in Weisbart was sufficiently long only because the court first assumed that the mailbox rule would apply to determine whether the claim was timely. In sum, the court mixed the two requirements, assuming that meeting one satisfies the other; made a conclusion that the claim satisfied the lookback period by first assuming that it had already qualified for the mailbox rule, which was the very issue the court was called to decide; and ultimately held that the claim was timely filed because it met the lookback period.

In November 2000, the IRS issued an Action on Decision [AOD-CC-2000-09 (Nov. 13, 2000)] essentially condemning the incorrect holding of Weisbart but deciding that it “will no longer argue that section 7502(a) does not apply under facts such as those in Weisbart. Accordingly, the service will apply … section 7502(a) in such cases and treat claims for refund included on delinquent original returns as filed on the date of mailing.”

2001: Revisions to the Section 7502 Regulations

The loss of the Weisbart case and the IRS’s decision to acquiesce led to swift revisions of the section 7502 regulations. These revisions led, among other things, to the addition of subparagraph (f) to Treasury Regulations section 301.75021. On its face, subparagraph (f) embodies the Weisbart rule by stipulating that when a delinquent return containing a claim for refund is postmarked within three years from the date of payment but received more than three years from the date of payment, the mailbox rule applies to the joint document such that both claim and return are deemed filed on the postmark date. The regulations offer an example based on a hypothetical taxpayer mailing a 2001 tax return, containing a claim for refund, on April 15, 2005; the return is received on April 18, 2005 (Exhibit 6). Since the return and claim were postmarked within three years from the date of payment, the mailbox rule would apply so that the claim is deemed timely.

The Weisbart opinion and the IRS’s decision to acquiesce and amend the section 7502 regulations in effect expand subparagraph (a) of section 6511 to say something it does not say. IRC section 6511(a) provides that a claim is timely if it is filed within three years of a return or two years from a payment—it does not say anything about any claim being timely if filed within three years from a payment. Nevertheless, this is the inevitable implication of the Weisbart opinion, at least in the case of delinquent returns embedding a claim for refund.

Open Season on Disallowed Claims?

The IRS’s commentary to the revisions made to the section 7502 regulations deserves attention (66 FR 2257-01). The commentary stated that the changes made to the mailbox regulations would “be applied retroactively to certain previously disallowed claims for credit or refund,” and that the IRS would “attempt to identify as many claims as possible that were filed on untimely original individual income tax returns and that were previously disallowed based on the government’s position in Weisbart” and “issue a refund, or credit the overpayment against a liability … without the need for the taxpayer to contact the IRS.” The commentary also states, however, that “such automatic reconsideration of the claim will generally occur if the claim was filed on an individual income tax return for 1995 or a subsequent calendar year.”

There are no apparent limitations as to how far back the revised section 7502 regulations are valid. For this reason, it may be wise for tax professionals to ask clients whether they ever had a claim disallowed by the IRS and, to the extent the answer is yes, to investigate why. The plain language of the IRS’s commentary indicates that the IRS will reconsider all claims for refund previously disallowed on grounds similar to those in Weisbart—no matter how old they might be.

Preparers should also consider this important lesson: the lookback period under IRC section 6511(b) is always lengthened by an extension of time to file. Therefore, it is advisable to always request an extension, without exception, even when the taxpayer files by the original due date or does not file at all. The extended lookback period can still be useful if and when a claim for refund is eventually filed.