25.6.1  Statute of Limitations Processes and Procedures (Cont. 2)

25.6.1.9 
Assessments

25.6.1.9.13  (10-01-2007)
Civil Penalties

  1. Civil Penalties exist to encourage voluntary compliance by supporting the standards of behavior expected by the Internal Revenue Code. Although penalties support and encourage voluntary compliance, they also serve to bring additional revenues into the Treasury, impose remedial charges against taxpayers, and indirectly fund enforcement costs; however, these results are not reasons for creating or imposing penalties. Compliance is achieved when a taxpayer makes a good faith effort to meet the tax obligations defined by the Internal Revenue Code.

  2. Civil Penalties (CVPN) are assessed or abated, on master file civil penalty modules (Master File Tax (MFT) 55 for Individual Master File (IMF) and MFT 13 for Business Master File (BMF)). A transaction code (TC) 150 (return filed) will never post to a civil penalty file. In addition to facilitating the assessment/abatement process, these procedures will allow for the tracking of assessment data through use of designated penalty reference numbers.

  3. The Examination, Collection and Information Returns Processing (IRP) functions assess civil penalties. The penalties are assessed or abated with a three digit Penalty Reference Number (PRN) for the type of penalty. A TC 240 (assessment) or TC 241 (abatement) posts with the PRN to the account. The PRN identifies the type of penalty as well as the function responsible for assessing the penalty.

  4. The Statute function will receive unpostable records for only those penalty assessments that have specific statute barred dates and the statute of limitations will expire within 120 days.

    Note:

    The Unpostable function resolves all other unpostable records.

  5. Some freezes on civil penalty modules were built into the Accounts Maintenance (AM) program. AM/STAT, AM/ST/–X 09, and AM/ST/–X 11 transcripts identify unresolved conditions from the AM program under MFTs 13 or 55. The Statute function will receive and resolve these freezes on transcript cases identified as CVPN if the statute expiration is imminent.

  6. A Statute Control Date (SCD) cannot be computed with a "normal" Assessment Statute Expiration Date (ASED) on CVPN transcript cases because the statute bar date depends on action or non-action by the taxpayer. A "dummy" ASED date is established for CVPN transcript cases.

  7. See IRM 21.2.4.3.3, Civil Penalty Modules, for additional information.

25.6.1.9.13.1  (07-29-2008)
Civil Penalty Research

  1. To handle Civil Penalty tax modules, you may need to refer to other Internal Revenue Manuals (IRMs) and Internal Revenue Code (IRC) Sections such as:

    • IRM 21.2.4, Master File Accounts Maintenance

    • IRM 20.1, Penalty Handbook

    • IRC Section 6652, Failure to File Certain Information Returns, Registration Statements, etc.

    • IRC Section 6652(f), Returns Required under Section 6039C registration statement, etc.

    • IRC Section 6679, Failure to File Returns, etc., with respect to foreign corporations or foreign partnerships

    • IRC Section 6686, Failure to File Returns or Supply Information by DISC or Former FSC

    • IRC Section 6694(a), Understatements Due to Unrealistic Positions

    • IRC Section 6695, Other Assessable Penalties with Respect to the Preparation of Income Tax Returns for Other Persons

    • IRC Section 6702, Frivolous Tax Submission

    • IRC Section 6707, Failure to Furnish Information Regarding Tax Shelters

    • IRC Section 6707A, Failure to Include Reportable Transaction Information with Return Regarding Tax Shelters

25.6.1.9.13.2  (10-01-2009)
Civil Penalty Procedures

  1. The Omnibus Budget Reconciliation Act (OBRA) of 1989 consolidated and renumbered several IRC provisions containing penalties relating to information shown on or omitted from the return. The proscribed conduct is now addressed in IRC Section 6662 under the Accuracy-Related Penalty. See IRM 20.1.5.1.1, Background, for a list of the penalties. The penalty is assessed through the use of PRN 680 (positive dollar amount) and abated with PRN 680 (negative dollar amount). When the penalty posts to MF, IMFOL or BMFOL it will reflect TC 240 (assessment) or TC 241 (abatement) along with the reference number 680.

    Note:

    The civil fraud penalty was also renumbered as IRC Section 6663 by OBRA 89 and made applicable only to return-related conduct. See IRM 20.1.5.14, Civil Fraud Penalty, for more information. An increase to the penalty for a fraudulent failure to file was enacted at IRC Section 6651(f).

  2. The examining officer in the area office will determine the SCD for civil penalty assessments under the following code sections:

    IRC Section 6652
    IRC Section 6652(f)
    IRC Section 6679
    IRC Section 6686
    IRC Section 6694(a)
    IRC Section 6695
    IRC Section 6695A
    IRC Section 6702
    IRC Section 6707
    IRC Section 6707A

    For a valid Penalty Reference number (PRN) for any of the penalties listed above, please refer to the current revision of Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

    Note:

    The Unpostable function will correct unpostable documents where there is no statute issue involved.

  3. A taxpayer may voluntarily pay the penalty imposed by IRC Section 6723 for failure to provide a Taxpayer Identification Number (TIN). If a case is referred to the Statute function with an imminent statute, you must do the following:

    1. Prepare Form 5734 to assess the payment amount using TC 200 in item 9 to indicate a penalty assessment.

    2. Staple the source document to the case file.

    3. Route to the Non Master File (NMF) Accounting Function.

25.6.1.9.13.3  (04-01-2007)
The Period of Assessment

  1. In general, the delinquency penalties, the accuracy-related penalty and information reporting penalties are assessed, collected, and paid in the same manner as taxes pursuant to IRC Sections 6665(a) and 6671(a). The general rules for determining the period for assessment are provided at IRM 25.6.1.9, Assessments, and the guidance for when a return is filed can be found at IRM 25.6.1.6.15, When a Document is Treated as Filed Under the IRC.

    Note:

    The Service is not required to make a separate assessment of the accruals on the IRC Section 6651(a)(2) and IRC Section 6651(a)(3) delinquency penalties to collect the accruals. See United States v. Krasnow, 548 F. Supp. 686 (S.D.N.Y. 1982) (involving collection action to collect accruals for the addition to tax under IRC Section 6651(a)(3)). These penalties could not be given full effect if the Service were required to assess within three years from the filing of the tax return because they can accrue over a 50 month period. The penalty accruing can not exceed 25% in the aggregate.

  2. The Preparer Penalties under IRC Section 6694(a) or IRC Section 6695 may be assessed within three years after the filing of the return or claim for refund with respect to which the penalty is assessed. There is no period of limitations regarding a willful attempt to understate tax or a reckless or intentional disregard of the rules or regulations under IRC Section 6694(b). See IRC Section 6696(d).

  3. Promoter Penalties are penalties for promoting abusive tax shelters under IRC Section 6700 or abetting an understatement of tax liability under IRC Section 6701 may be assessed at any time because they do not relate to a return.

25.6.1.9.13.4  (11-15-2007)
Resolution-CVPN STAT/AM-X Transcripts

  1. Civil Penalty STAT transcripts are extracted using the minimum amount of time until the ASED. The "dummy" ASED date established for civil penalty accounts is 2 years and 6 months from the date of the control DLN in the module.

  2. You will request a hard copy MFTRA transcript for all civil penalty cases (complete entity and all active modules). You must establish a civil penalty name line by using Form 2363 and TC 013, if the master file name line of the taxpayer being assessed is joint. DO NOT change the name line of the MFT 30 account.

  3. A Master File (MF) entity must be established using Form 2363 for MFT 13 or 55, if MFTRA shows no record.

    Note:

    Each campus will establish local procedures with the Entity function to accomplish the establishment of entities described above.

  4. The Trust Fund Recovery Penalty Cases under IRC Section 6672 (The 100% penalty) are processed in the Compliance Service Collection Operation (CSCO). The Statute function will route any Trust Fund Recovery Penalty cases received to CSCO.

  5. If there is a TC 240 in the account and research does not result in resolution, contact the area responsible for assessing the penalty for assistance in resolving the condition. If unable to determine the area responsible for assessing the penalty, and all other efforts have been exhausted to determine where the credit belongs, transfer the credit(s) to XSF as indicated in this IRM and IRM 3.17.220,Excess Collection File.

  6. If there are multiple penalties in the account, contact the area responsible for the last assessed penalty. (A TC 240 in a 59 blocking series indicates a systemically (computer) generated IRP civil penalty).

  7. If there is credit and no TC 240 on the account module, see the procedures in IRM 21.2.4.3.3.1, Civil Penalties Processing for resolution.

  8. If the Civil Penalty transcript is a STAT-01 caused by an unreversed TC 360, the procedures to resolve this type of transcript is found in IRM 21.2.4.3.32, Debit Balance, No Return (01-X).

25.6.1.9.14  (09-12-2014)
Protective Manual Assessments (PMA)

  1. Use PMA processing procedures on Statute of Limitation cases where time does not permit normal research for statute clearance of original delinquent returns or other types of Accounts Management statute transcripts and amended returns.

  2. Prepare Form 2859, Request for Quick or Prompt Assessment. Write "PMA" across top of Form 2859 in "red" and route it to the Accounting function. Establish local procedures on how these cases will be identified as PMA, e.g., red folders.

    Note:

    If applicable, penalty and interest should be computed in addition to the tax to the 23C Date of the PMA.

  3. When preparing Form 2859, assess necessary interest to the 23C Date.

    1. If the PMA is to be assessed in full, do not adjust the interest (input TC 190 for zero). When the notice posts, the computer will assess the accruals to the posting date.

    2. If partially abating PMA and the interest is not restricted, then it will automatically be reduced, when tax or penalties are reduced.

      Note:

      By not assessing on IDRS, it will eliminate unnecessary "-I" freezes.

    3. If a TC 340 is required, do not assess interest on the PMA, instead update IDRS when assessing the PMA.

  4. Advise Accounting function to delay assessment notices and transfer of account to the master file until the assessment is determined to be correct. The notification should never exceed 45 days from the date of the Form 2859.

  5. If the assessment is substantiated, prepare a two-way memo with documentation attached and route to the Accounting function with a "copy" . Be sure "Copy" is reflected on the Form 2859 of the original Form 2859.

  6. If the full abatement is necessary, prepare Form 1331–B and route it to the Accounting function with a two-way memo and a "copy" of the original Form 2859.

  7. If the assessments are not abated or substantiated, the Accounting function must follow up with the originator for a determination. This will ensure that statutory notices required on certain types of assessments are issued to the taxpayers within 60 days of the date of the assessment (IRC Section 6303).

  8. Refer to IRM 3.17.243, Miscellaneous Accounting, for processing Quick, Prompt, and Jeopardy Assessments.

25.6.1.9.14.1  (01-16-2009)
Other Area Protective Manual Assessment (PMA)

  1. The other functional areas preparing the manual assessment must decide if the assessment is "Agreed" or "Unagreed" according to IRS's financial definition. These PMAs are usually IRS initiated assessments. Input one of the following in the remarks section of Form 2859:

    • Agreed Prompt

    • Unagreed Prompt

    • Agreed Other

    • Unagreed Other

    • Agreed Exam

    • Unagreed Exam

    • Appeals Assessment (always agreed)

    • CAWR/FUTA

  2. AGREED Assessments are as follows:

    • Taxpayer (TP) agrees to the assessment

    • The courts have ruled the amount is owed

    • Voluntary filed returns

    • TP agreed to pay through an installment plan

    • TP agrees to SFR assessment

  3. UNAGREED Assessments are as follows:

    • TP does not respond to a proposed assessment

    • TP does not agree to the assessment

    • TP does not agree to SFR assessment

  4. See IRM 3.17.46, Automated Non-Master File Accounting, for further information.

25.6.1.9.15  (10-05-2011)
Assessment Tolerance Level

  1. Do not prepare a barred assessment report if the tax assessment was not processed timely and the amount to be assessed is below the established tolerance level for your case type. Use Command Code (CC) FRM 77 to input Transaction Code (TC) 971 with Action Code (AC) 90 on IDRS for IMF and BMF account to identify under tolerance cases.

    Note:

    Other functional areas should not take any further action on this type of case unless verified with Statutes.

  2. Input a TC 290 for zero amount using the appropriate blocking series and closed your control base on IDRS after the above action is completed.

25.6.1.10  (11-18-2011)
Claims, Abatements and Refunds

  1. This section provides instructions for processing claims for credit or refund, request for abatements and non-tax claims.

  2. To answer technical tax law questions, refer to individual tax law publications and the Internal Revenue Code (IRC) and the information provided in this section and the following provisions, which provide guidance or the rules for calculating the general period of limitations for claiming credit or refund:

    • See IRM 25.6.1.6.14, Criteria for Establishing a Statute of Limitations Period

    • See IRM 25.6.1.6.15, When a Document Is Treated As Filed Under the IRC

    • See IRM 25.6.1.7.2, Time When Payments and Credits are Considered to be Made

  3. To handle claims, abatement requests and non-tax claims you may need to refer to the following Internal Revenue Manuals (IRMs):

    • IRM 21.5.1, General Adjustments

    • IRM 21.5.2, Adjustment Guidelines

    • IRM 21.5.3, General Claims Procedures

    • IRM 21.5.6, Freeze Codes

    • IRM 21.5.9, Carrybacks

    • IRM 25.6.1, Statute of Limitations Process and Procedures

  4. You may also need to refer to the following IRC sections:

    • IRC Section 6407, Date of Allowance of Refund or Credit

    • IRC Section 6511, Limitations on Credit or Refund

    • IRC Section 6513, Time Return Deemed Filed and Tax Considered Paid

25.6.1.10.1  (10-01-2013)
Requests for Abatement

  1. In general, a taxpayer may request an abatement using Form 843, Claim for Refund and Request for Abatement. IRC Section 6404(b) provides that taxpayers have no right to file a claim for abatement of income, estate, or gift tax. A taxpayer may, however, request an abatement of an assessment of employment tax which is excessive or was illegally or erroneously assessed. The following is a list of some of the other items for which a taxpayer may request an abatement:

    • Abatement of interest relating to income, estate, gift, generation-skipping, and certain excise taxes whose accrual is attributable to any unreasonable error or delay in performing a ministerial or managerial act as stated in IRC Section 6404(e).

    • Abatement of any penalty or addition to tax (but not the tax) attributable to erroneous written advice from the Service pursuant to a specific written request and on which the taxpayer reasonably relied upon as stated in IRC Section 6404(f).

    • Abatement of penalty or interest for any taxpayer granted relief because of a Presidentially declared disaster or a terroristic or military action as stated in IRC Section 7508A(a)(2).

    • Abatement of a"math error" assessment (any reassessment must use the deficiency procedures) as stated in IRC Section 6213(b)(2).

    • Application of net rate interest netting on overlapping tax underpayments and overpayments under Rev. Proc. 2000–26, 2000–1 C.B. 1257 as stated in IRC Section 6621(d).

    • Removal of penalties under the Post-Assessment Penalty Appeal process. See http://core.publish.no.irs.gov/irm/p08/pdf/irm08-011-004--2012-09-14.p in IRM 8.11.4.1, Penalty Appeals (PENAP) Program.

  2. Although IRC Section 6404(b) provides that taxpayers have no right to file a claim for abatement of income, estate, or gift tax, the Service will consider a taxpayer’s request for an abatement of such taxes where the taxpayer files an amended return with the IRS that shows a decrease in the tax that was assessed.

    Note:

    If an amended return is received either before or after the ASED requesting an abatement of tax and there are conditions which meet Examination criteria, you must send to Exam for review before making the abatement.

  3. A taxpayer may label a filing as a request for an abatement, but the filing may also include a request for the return of a paid assessment (i.e., a claim for credit or refund). The claim for credit or refund of an overpayment is subject to the requirements of section 6511. The period of limitations for filing a claim must be open and the amount of the credit or refund is limited by the lookback limitation per the 2 or 3 year rule.

25.6.1.10.1.1  (11-18-2011)
Abatement Authority

  1. An abatement is the reduction or elimination of an assessment. There are several circumstances when a taxpayer may request an abatement. The IRS also has general abatement authority under IRC Section 6404.

  2. Section 6404 provides the general abatement authority for the IRS.

    1. Section 6404(a) permits the IRS to abate a liability where the liability is improper, either because it is excessive in amount or illegally made. This includes an assessment made after the expiration of the ASED. See http://core.publish.no.irs.gov/irm/p01/pdf/irm01-002-012--2012-06-15.p in IRM 1.2.12.1.15, Policies Statement 2-89 (Approved 09-20-1999), which clarifies when the Service will reconsider an unpaid assessment.

    2. Section 6404(c) permits the IRS to abate a liability when the IRS determines that the administration and collection costs involved would not warrant collection of the liability.

      Note:

      Sections 6404(e) and (f) provide for the abatement of interest or penalties in certain specified situations.

  3. The decision to abate or not abate should include a finding that the explanation or documentation to support the request for abatement is sufficient or insufficient. If Examination criteria applies and the request for abatement contains an explanation or documentation supporting the adjustment, forward the request to CAT-A Exam for classification (see Exhibit 21.5.3-1).

  4. If you are unable to verify documentation to abate the balance due amount, you can send the taxpayer a 916C (no consideration) letter requesting full payment of the amount owed and instruct the taxpayer to file a claim for refund with all supporting documents. Do not send a disallowance letter on these types of cases. Do not deny a request for abatement solely because the tax has not been paid.

  5. If a case has been referred to the Department of Justice, a litigation freeze code, "TC 520," is placed on the taxpayer’s account to prevent the IRS from taking any unauthorized action on the account. When a freeze code is in place on the account, IRS personnel are instructed to take no action on the account without first contacting the “litigation contact” and getting appropriate authorization. IRM 25.6.1.10.2.1.1.2, Unauthorized Abatements Made After Referral to the Department of Justice.

    Note:

    The IRS can process and apply any payments or credits that are made by a taxpayer after a liability has been referred to the Department of Justice.

  6. An abatement should not be made of any paid portion of an assessment for which a refund cannot be made. Section 6511(a) provides that a claim for credit or refund must be filed within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever is later. Section 6511(b) limits the amount of the credit or refund to the amount paid within the 2 or 3 year period before the date of a claim.

    1. If the entire claim for credit or refund is non-refundable due to the Refund Statute Expiration Date (RSED) passing, do not input a correction to create an overpayment. Input a TC 29X for zero with Blocking Series 98/99, and send the taxpayer Letter 105C, Claim Disallowed-Full.

    2. If the taxpayer is entitled to a partial credit or refund, you must input the tax decrease that will generate only partial credit or refund, and send the taxpayer Letter 106C, Claim Disallowed-Partial for the amount barred from crediting or refunding.

    3. If the claim for refund is fully allowable, input the tax adjustment to create the overpayment. A manual refund must be input if the normal 3 year period for refund has expired.

  7. Penalties and interest should not be abated on a full paid account if the overpayment created is barred from refunding because the RSED has passed and no condition exists that will extend the refund period. Input a TC 29X for zero with Blocking Series 98/99 and send the taxpayer a disallowance letter. This is true even if the taxpayer’s claim for penalty abatement is based on reasonable cause.

  8. Employees must not release credit balances for refund or offset where a Substitute For Return (SFR) assessment is on an account. SFR adjustments are input with a Hold Code 4. The hold code freezes the credit from refunding or offsetting and will cause an AM05, ST08 or AM-X05 Transcript to generate for review.

25.6.1.10.1.2  (11-18-2011)
Abatement After the Assessment Statute Expiration Date (ASED)

  1. Although an abatement (tax, penalty, or interest ) may be made before or after the ASED, the tax cannot be reassessed if it is determined that the tax decrease was erroneous after the ASED has expired. See IRM 25.6.1.10.2, Erroneous Abatement, for more information. Therefore, it may be necessary to consider the ASED in determining whether it is appropriate to exercise the Service’s abatement authority, or to require the taxpayer to pay the assessed tax in full and file a claim for refund or petition the Tax Court with respect to a final notice of determination.

25.6.1.10.2  (11-18-2011)
Erroneous Abatement

  1. An erroneous abatement is an abatement of tax that is later determined to have been made in error, either because the information provided by the taxpayer did not justify the tax abatement or because the Service lacked the authority to make the tax abatement.

  2. It is very important to understand the context of the erroneous abatement because this will likely dictate how the IRS can proceed. In some instances, the amount abated can be reversed but otherwise it must be reassessed.

25.6.1.10.2.1  (11-18-2011)
Corrective Action for an Erroneous Abatement

  1. The context of the erroneous abatement will dictate the corrective action required. The general rule is that when an assessment is abated and the IRS later decides that its decision to abate was incorrect, the IRS must make a new assessment. There are, however, three exceptions to this general rule where an erroneous abatement can be reversed and a new assessment is not required. Reversal of an erroneous abatement is accomplished by the responsible Statute and Originating Functions. IRM 25.6.1.10.2.2, Controlling Erroneous Abatement Cases, for all cases involving erroneous abatements where reversal is not authorized because the information provided by the taxpayer did not justify the tax abatement. The account correction is handled by Exam, if the ASED has not expired.

    Caution:

    Where an erroneous abatement results in an erroneous refund, additional rules may govern the corrective actions required of the IRS. In these cases refer also to IRM 21.4.5, Erroneous Refunds and IRM 25.6.1.10.2.3, Remedies for Recovering an Erroneous Refund.

  2. The first step is to determine whether the erroneous abatement can be reversed. Reversal is only appropriate in three circumstances, where the erroneous abatement was based on a clerical error, was an unauthorized post-referral abatement, or was due to a collectibility determination made following a bankruptcy discharge. For more information on reversal of erroneous abatements IRM 25.6.1.10.2.1.1, Reversal of Erroneous Abatements.

  3. If the erroneous abatement cannot be reversed, the next step is to determine whether it can be reassessed. In order to be reassessed, the amount abated must be greater than the tolerance level and the new assessment must occur before the ASED expires. For specific instructions, IRM 25.6.1.10.2.2.1, Correction of Erroneous Abatements by Exam Function.

  4. If the erroneous abatement cannot be reversed or reassessed certain administrative steps must be followed, including the preparation of a Barred Assessment Report on Form 9355, Barred Statute Report. For specific instructions, IRM 25.6.1.10.2.2.1, Correction of Erroneous Abatements by Exam Function.

25.6.1.10.2.1.1  (11-18-2011)
Reversal of Erroneous Abatement

  1. Erroneous abatements can be reversed in limited circumstances. In these cases, new assessments are unnecessary. Reversal is appropriate only in the following circumstances:

    1. Clerical errors

    2. Unauthorized abatements made after referral to the Department of Justice

    3. Abatements due to bankruptcy discharges

    Note:

    IRM 25.6.1.10.2.3, Remedies for Recovering an Erroneous Refund, for instructions on how to collect a balance due that results from the reversal of an erroneous abatement.

25.6.1.10.2.1.1.1  (11-18-2011)
Clerical Errors

  1. A clerical error is a change to an assessment that is not based on an adjustment in the tax liability. Examples of a clerical error are:

    1. An input document is misread or a keypunch error is made; e.g., misreading an input document with a disallowance of a deduction to be an allowance or keypunching a $15,000 abatement instead of a $1,500 abatement.

    2. An abatement is entered for the wrong tax year, wrong tax type, or wrong taxpayer based on a misreading of input documents or a keypunch error.

  2. In general, an erroneous abatement due to a clerical error may be reversed before or after the ASED (See Crompton-Richmond Co. v. United States, 311 F. Supp. 1184, (S.D.N.Y. 1970); Bugge v. United States, 99 F.3d 740 (5th Cir. 1996) unless the taxpayer would be prejudiced by the reversal.

  3. Where clerical error abatement results in an erroneous refund and cannot be reversed, the IRS is limited to the following methods for collecting the erroneous refund: erroneous refund suit, refund offset or voluntary repayment. See IRM 21.4.5, Erroneous Refunds and IRM 25.6.1.10.2.3, Remedies for Recovering and Erroneous Refund.

25.6.1.10.2.1.1.2  (11-18-2011)
Unauthorized Abatements Made After Referral to the Department of Justice

  1. Any abatement of an unpaid tax made by the IRS for a liability that has been referred to the Department of Justice must be authorized by the Department of Justice or it will be void. Because an unauthorized post-referral abatement is void, it can be reversed and the original assessment remains valid.

  2. Following the referral of a case to the Department of Justice, the Department of Justice has the exclusive authority to make and approve adjustments to the referred liabilities. Title 28 of the United States Code and Executive Order 6166 provide that the conduct and control of all federal tax litigation, except in the Tax Court, is vested in the Department of Justice. In addition to Title 28 and the Executive Order, IRC Section 7122(a) gives the Attorney General the exclusive authority to compromise a case arising under the Internal Revenue Code after referral to the Department of Justice for prosecution or defense.

  3. After a case has been referred to the Department of Justice, a litigation freeze code, "TC 520" is placed on the taxpayer’s account to prevent the IRS from taking any unauthorized action on the account. When a freeze code is in place on the account, IRS personnel are instructed to take no action on the account without first contacting the “litigation contact” and getting appropriate authorization. Note: The IRS can process and apply any payments or credits that are made by a taxpayer after a liability has been referred to the Department of Justice

  4. A Justice Department referral is considered to be in effect with respect to any tax liability once a suit letter or a defense letter is sent from the IRS to the Department of Justice. A referral remains in effect unless the Department of Justice notifies the IRS in writing that the referral is terminated. Even if the Department of Justice has obtained a judgment for the tax liabilities and then returns the case to the IRS for collection, authority remains with the Department of Justice.

25.6.1.10.2.1.1.3  (11-18-2011)
Abatements Due to Bankruptcy Discharge

  1. Bankruptcy discharges do not extinguish the discharged tax liabilities. The Service may, however, abate otherwise proper assessments against a taxpayer following a bankruptcy discharge, where the Service determines that collection of the discharged tax is unlikely. Such an abatement is generally based on the factual assumption that the taxpayer has no assets or money to collect.

  2. If collection of the discharged tax later becomes feasible within the applicable collections limitations period, any abatement made because of the bankruptcy discharge may be reversed in order to once again reflect the taxpayer’s liability on the Service’s books and account for the collection of the liability.

  3. Section 6404(c) authorizes abatement of a discharged tax liability. Section 6404(c) permits the Service to reduce assessments when the Service determines that the administration and collection costs would not warrant collection of the amount due. Unlike a determination made under section 6404(a), a determination under section 6404(c) has nothing to do with the merits of a taxpayer’s tax liability or the merits of an assessment. A section 6404(c) determination is a collection determination and is therefore reversible.

25.6.1.10.2.2  (11-18-2011)
Controlling Erroneous Abatement Cases

  1. For all cases involving erroneous abatements where reversal is not authorized, correction is handled by Exam. In general, with an erroneous abatement, the amount abated must be reassessed using the Examination deficiency procedures (route case to the Examination Operation) before the ASED passes. If Examination cannot reassess the erroneous abatement because the ASED has passed, you must prepare Form 9355,Barred Assessment Report. IRM 25.6.1.13.2.4, Identifying Barred Statute Cases, for more information on barred cases. The overpayment created by the tax decrease must be moved to XSF. Statute function employees must never reassess the tax on this type of case.

  2. For all cases requiring reversal of erroneous abatements, the Statute function is the "Centralized Control Point" between the function that made the erroneous abatement" Originating Function" ) and Accounting. IRM 25.6.1.10.2.2.2, Correction of Erroneous Abatement Cases by Statute, for controlling such cases in Statute. IRM 25.6.1.10.2.3, Remedies for Recovering an Erroneous Refund, for an overview of the legal remedies for such cases. As the “Central Control Point” Statute will ensure corrective actions are taken on the case.

  3. For cases involving erroneous abatements requiring reversal after the ASED has passed, the Originating Function must initiate corrective action. IRM 25.6.1.10.2.2.3, Correction of Erroneous Abatement Cases by the Originating Function, concerning the preparation of Form 3465, Adjustment Request, and Form 12810, Account Transfer Request Checklist.

    Note:

    If the Originating Function is an Area Office, Statute will initiate the corrective action.

25.6.1.10.2.2.1  (11-18-2011)
Correction of Erroneous Abatements by Exam Function

  1. These procedures apply to all erroneous abatement cases where reversal would not be appropriate. Reversal of an erroneous abatement is only appropriate when there is a clerical error, a post-referral erroneous abatement, or when there was an abatement due to a bankruptcy discharge.

    Note:

    For cases where the erroneous abatement resulted in an erroneous refund, refer to IRM 21.4.5,Erroneous Refunds, for additional instructions on the corrective actions required.

  2. The tax liability erroneously abated must be reassessed before the ASED (by use of the Examination Operation procedures for the underlying tax including where applicable, the deficiency procedures) in order to collect any balance due that would result after correcting the erroneous tax abatement. "Statute Employees" do not have the authority to reassess the erroneous abatement even if the overpayment created is still on the account.

  3. Once the tax has been reassessed, normal administrative collection procedures apply and any erroneous refund can be recovered within the Collection Statute. See IRC 6502 or IRM 25.6.1.12, Collection Statute Expiration Date (CSED).

  4. Additionally, an erroneous refund can be recovered by an erroneous refund suit, refund offset or voluntary repayment. See IRM 21.4.5, Erroneous Refunds.

  5. If the Examination Operation cannot reassess the tax because it is below the tolerance level required for assessment or the ASED has passed and the overpayment credit is still on the account, you must do the following 4 things:

    1. Send the overpayment credit to the Excess Collection File (XSF).

    2. Input a Transaction Code (TC) 29X for zero using Blocking Series 98/99 and send a disallowance letter (105C).

    3. Prepare Form 9355, Barred Assessment Report, if the abatements are above the tolerance level. IRM 25.6.1.13.2.4, Identifying Barred Statute Cases, for erroneous abatements tolerance level.

    4. Input transaction code (TC) 971 action code (AC) 90 on IDRS if the abatement does not meet the tolerance level. IRM 25.6.1.10.2.2.4, Tolerance Level, for erroneous abatements cases.

  6. If you are making a correction to the tax liability after the ASED, you must not do the following:

    • Collect any balance due. Any balance due that would result after correcting the erroneous abatement may not be collected if the correction is not made until after the ASED.

    • Offset against a claim for credit or refund.

    Exception:

    In situations where the request for credit or refund relates to the same taxpayer and same tax year as the adjustments for which the ASED has passed. Under these circumstances, the Service may net out the amount requested with adjustments for which the ASED has passed. IRM 25.6.1.10.2.5.7, Offsetting the Amount of a Refund With a Time-barred Adjustment, for more information on offset of a time barred adjustment.

25.6.1.10.2.2.2  (11-18-2011)
Correction of Erroneous Abatement Cases by Statute

  1. As the "Central Control Point" between an Originating Function and Accounting, the Statute team provides a tracking method to ensure that erroneous abatement (non-rebate) cases are being corrected. Statute will not review cases from other areas for accuracy, completion of case, etc.

  2. Statute will determine the responsible function for an erroneously abated tax. You must manually control all "Erroneous Abatement" cases on IDRS and use Category Code "ERAB" .

  3. When a case has been routed to the responsible function for corrective action, create and maintain a control on IDRS. Statute will control one and the Originating Function the other.

  4. You must route the case via transmittal, Form 3210,Document Transmittal, to the Originating Function area. Statute will retain one copy of Form 3210. If the case is not returned to Statute within 30 calendar days, Statute employees must access IDRS to determine if it is controlled and being worked by the Originating Function. The manager of the Originating Function should be notified that the turn-around time has expired, and Statute has not received the case file (method of notification is optional in each campus).

  5. The Originating Function will reassign their control base on IDRS to the control base assigned to Statute when the corrective action has been taken. The case will be routed to Statute via Form 3210. Statute will sign the Form 3210 reflecting date of receipt, check off case(s) by TIN, and return original Form 3210 to the Originating Function. Statute will update their control base at this time indicating the case has been sent to Accounting.

  6. Statute must request notification (via the two-way memo) from Accounting Journal Unit when the Accounting action is completed.

  7. Statute employees will review the tax module to ensure a TC 400 has posted to the master file when the Journal Unit notifies the Statute Team that action was taken to reverse the erroneous abatement and the taxpayer has been sent a copy of the reversal document.

    Note:

    You must allow 45 days for Accounting to complete the action necessary to reverse the abatement. The statute examiner who has responsibility of the case must notify their manager if notification is not received within 45 days. The statute manager should notify Accounting of any delays.

  8. Close your control base on IDRS once you receive notification from Accounting that all actions outlined above were taken.

25.6.1.10.2.2.3  (11-18-2011)
Correction of Erroneous Abatement Cases by the Originating Function

  1. The originator of an erroneous abatement requiring reversal must initiate the corrective action whether or not assigned to Statute.

    Exception:

    If the initiator is an employee in an Area Office, Statute will correct the erroneous abatement.

    Note:

    The Originating Function is responsible for corrective actions on cases where the originator is no longer working in the area where the erroneous abatement occurred. This is regardless of whether the assessment statute has/has not expired.

  2. Employees who are responsible for correcting erroneous abatement cases must follow the instructions below on cases above the tolerance level where errors were made or discovered after the ASED had expired. IRM 25.6.1.10.2.2.4,Tolerance Level.

    1. Prepare Form 3465, Adjustment Request and Form 12810, Account Transfer Request Checklist. The Originating Function will prepare a Form 3465, and Form 12810, requesting Accounting to reverse the erroneous abatement using the date the assessment posted to MF of the prior tax assessment (i.e., TC 150, 290, 300). Multiple assessment dates must be addressed and included on Form 12810 if the erroneous abatement being reversed exceeds the prior tax assessment. Show the amount of erroneous abatement to be reversed. Enter the amount in red on Form 12810.

    2. Request Accounting to transfer the account to Non-Master File (NMF) using TC 400 procedures.

    3. Compute any penalty, addition to tax, and interest as if the erroneous abatement had never occurred.

    4. Enter taxpayer’s name, address, TIN and all other pertinent information

    5. Enter in the "Remarks" area:" Reversal of Erroneous Abatement-For NMF Processing" .

    6. State on Form 12810 "Do Not Bill The Taxpayer" Circle this entry in red.

    7. Include a current MFTRA transcript print with your case.

    8. Prepare a credit transfer document(s), if appropriate.

    9. Prepare a 510C Letter to the taxpayer if a balance due results from the reversal. Compute penalty, addition to tax, and interest to the date of billing and provide the taxpayer with the balance due. In addition, include an explanation to the taxpayer.

      Note:

      Do not send the letter at this time but include it with the case file. Accounting will send the letter and the bill to the taxpayer.

      Note:

      Master File computer programming prevents the reversal of an abatement after the ASED.

  3. To handle such erroneous abatements you may need to reference:

    • Integrated Data Retrieval System (IDRS)

    • IRM 3.17.243.2, Reversal of Erroneous Abatements

    • IRM 3.17.46.2.9, Reversing Erroneous Abatements

  4. The role of the Accounting Function after the ASED has expired is to reinstate the assessment on Non-Master File (NMF) using an automated accounting system and, if a balance remains on the account, bill the taxpayer pursuant to IRM 3.17.46.2.9,Reversing Erroneous Abatements. When the reinstatement must be made expeditiously, the Accounting Function will use IRM 3.17.243.2, Reversal of Erroneous Abatements.

  5. Two-Way Memorandum

    1. The Originating Function will prepare a two way memo to the Chief, Accounting Operation.

    2. The memo will set forth the conditions surrounding the erroneous abatement, the amount of tax considered still due, penalty, addition to tax, and interest, TIN, type of tax, and the tax period.

    3. The Operation Chief of the preparer of the memo must approve and sign the memo before it is routed to the Accounting Operation (through Statute for control purposes).

    4. Statute will "stamp" the memo in the lower right corner to show the case has been routed through Statute before being routed to the Accounting Operation.

  6. Missing Information or Incorrectly Prepared Cases-

    1. If required information is missing or case is incorrectly prepared, Accounting will route the case through Statute for control purposes before routing to the originator.

    2. Statute will "X" through the area on the memo which was previously "stamped" before routing to the originator. Do this in red. Statute will re-stamp the memo on all corrected cases.

    3. Returned cases indicated in ( a) and ( b) must be routed through the manager of the employee that caused the erroneous abatement.

    4. For control purposes, the manager of the employee must ensure the case is corrected and returned within 10 workdays to Statute. Statute will update control bases and then route the case to Accounting.

25.6.1.10.2.2.4  (11-18-2011)
Tolerance Level

  1. Do not reverse erroneous abatements of ≡ ≡ ≡ or less of tax where the ASED has expired because the Originating Function did not take action due to the tolerance level.

    Note:

    If an account is in credit balance for an under tolerance amount, you must transfer the amount to Excess Collection and follow procedures in (2) and (3) below. If an account is not in credit balance for an under tolerance amount, but payments have posted to the account for the tolerance amount, route the case to Accounting for reversal under normal procedures.

  2. Use CC FRM77 to input TC 971 with Action Code (AC) 90 on IDRS for IMF and BMF accounts to identify under tolerance cases. If more than one account is involved, put the action above on each account.

    Note:

    Other functional areas should not be taking further action on these cases unless first verifying with Statute.

  3. Input TC 290 for zero amount using the appropriate blocking series and close your control base on IDRS after the above action is completed. Also, you must send a disallowance letter to the taxpayer because the taxpayer is not entitled to a refund.

25.6.1.10.2.3  (11-18-2011)
Remedies for Recovering an Erroneous Refund

  1. You may need to reference the following:

    • IRM 21.4.5, Erroneous Refunds

    • IRM 3.17.80, Working and Monitoring Category D, Erroneous Refund Cases in Accounting Operations

  2. In processing the recovery of refund, you must route all IMF Rebate Refund Cases to the Examination function for assessment before the ASED expires. For Non-Rebate Refund Cases, you should follow the procedures in IRM 21.4.5.4, depending on the type of clerical error in your case.

25.6.1.10.2.3.1  (11-18-2011)
Recovery of Assessable Erroneous Refunds

  1. Recovery may be made by tax assessment procedures to the extent an erroneous refund results from an erroneous abatement due to a substantive redetermination of tax liability. The assessment may be recovered through tax collection procedures described above.

    Note:

    The Service would assess more than the amount of the erroneous refund if more was owed (e.g., interest, penalty, and etc.)

    Note:

    An example of a substantive redetermination of a tax liability is when a taxpayer submits an amended return requesting a decrease in tax, which was allowed by the Service without fully screening the return. The abatement of tax results in a reduction in the tax liability shown on the taxpayer’s account even though the Service fails to review or inadvertently fails to screen the entire return prior to the tax decrease.

  2. Once the erroneous amount has been assessed, normal administrative collection procedures apply and the amount can be recovered within the Collection Statute. See IRC 6502 or IRM 25.6.1.12, Collection Statute Expiration Date (CSED).

  3. Additionally, an erroneous refund that has been assessed can be recovered by an erroneous refund suit, refund offset or voluntary repayment. See IRM 21.4.5, Erroneous Refunds.

    Caution:

    An Erroneous Abatement case must not be reassessed on Masterfile or Non-Masterfile after the ASED has expired. It would be an illegal assessment of a tax. (A reversal of an erroneous abatement is not considered a reassessment of tax.)

  4. If an erroneous abatement has occurred due to a substantive redetermination of tax liability (Rebate Abatement) after the ASED has passed and the credit is still on the account, you must send the credit to the Excess Collection File (XSF) and not reassess it on the taxpayer’s account. You must prepare a barred assessment report (i.e., Form 9355Barred Statute Report) because the assessment cannot be legally reversed on the taxpayer’s account.

25.6.1.10.2.3.2  (11-18-2011)
Recovery of Unassessable Erroneous Refunds

  1. This section generally involves "double" refunds made to a taxpayer or a refund made to the wrong party. For additional examples of unassessable erroneous refunds, See IRM 21.4.5.4.5, Overview of Category D Erroneous Refunds.

  2. Unassessable erroneous refunds can be recovered by an erroneous refund suit, refund offset or voluntary repayment. See IRM 21.4.5.14, Collection Methods for Category D Erroneous Refunds. Administrative collection actions such as the issuance of a lien or a levy can not be taken.

25.6.1.10.2.4  (11-18-2011)
Overstated Estimated Tax or Withholding Credits

  1. You may need to reference IRM 21.4.5,Erroneous Refunds, (see Category "B" Erroneous Refunds).

  2. Taxpayer's account overstates the amount of Estimated Tax Credits (ES) or Withholding (WH) Credits, and the overstated amount was allowed against the tax reported on the return, then the overstated amount of ES or WH Credits will be assessed as an amount due on the taxpayer's account, just like an assessment made for a math error. You must input a TC 29X for the ES or WH overstated amount and use reason code for ES or WH on your adjustment without reference number. Unlike the math error, the taxpayer may not request an abatement of the assessment and any balance due may be assessed per IRC Section 6201(a) (3). With respect to overstated ES or WH credits, you are allowed to reverse these credits after the ASED expires. However, you must not reverse other prepaid credits (i.e., EIC, Additional Child Tax Credit (ACTC) after the ASED expires). You must not make an adjustment to reduce the amount of EIC or Advance Child Tax Credits after the ASED expires because it will create a negative tax amount per IRC Section 6211 (b) (4) (B). If you allow any of the other prepaid credits after the ASED, the credit must be applied to the Excess Collection File, and a 105C, Claim Disallowance letter must be sent to the taxpayer with appeal rights.

  3. A refund based on overstated credits may be recovered by a civil suit. IRM 25.6.1.10.2.3.1, Recovery of Assessable Erroneous Refunds, for more information on this type of refund recovery.

  4. If the overstated ES or WH credits are discovered before a refund is issued, the overstated credits should be assessed rather than "reversed" on the taxpayer’s account on Master File, unless a notice regarding the disallowance of the claim for refund based on the overstated credits is sent by certified or registered mail. See IRC Section 6532(a)(1).

25.6.1.10.2.5  (05-17-2004)
Claims for Credit or Refund - Processing Directions

  1. This section provides procedures for processing claims for credit or refund.

25.6.1.10.2.5.1  (09-12-2014)
Statute Year Amended Returns Requesting a Credit, Tax Decrease, or No Tax Change

  1. Amended returns reflecting a decrease in tax are generally processed following the procedures in IRM 21.5, Account Resolution, with reference to the guidance provided by IRM 21.6, Individual Tax Returns, and IRM 21.7, Adjustments Business Tax Returns and Non-Master File Accounts.

  2. Beginning February 6, 2012, Submission Processing (SP) at the three IMF SP Campuses (Fresno, Kansas City and Austin) will start working claims for credit, refund and no tax change on statute year amended tax returns. All statute year returns 2011 and prior will be forwarded to the statute team for assessment screening. On claims for credit, refund and no tax change, the statute team employee will stamp the document as "No Statute Issue" and forward the amended returns to SP following local procedures (no cover sheet required). SP will follow the procedures in IRM 3.11.6.6, Processing Form 1040X Using IDRS for Input of Adjustment and IRM 3.11.6.11, 1040X Routing Guide, for forwarding amended return cases to Account Management that meet Adjustments Function Criteria (AFC) at the three campuses stated above. The Accounts Management/Adjustment Function will continue to process amended returns from the other statute campuses indicating a tax decrease where the Refund Statute Expiration Date (RSED) is imminent/expired. If a timely amended return or an untimely amended return claiming a decrease in tax is received in statute for processing, the statute employee will stamp the document as "No Statute Issue" and return it to the originator or forward it to Accounts Management/Adjustment for resolution. See Exhibit 25.6.1-2, Form 1040 Extended RSED, for more information.

  3. If a timely claim for a tax decrease is referred to the Statute function for review and research shows an unreversed TC 420 (Examination Indicator) or 424 (Examination Request Indicator), you must:

    1. Stamp the claim timely.

    2. Enter your employee number and current date.

    3. Route the claim back to the originator.

  4. If an untimely claim for refund is referred to the Statute function for review and research indicates an unreversed TC 420 or 424, forward the claim to the Examination function.

  5. Employees must not release credit balances for refund or offsets where a Substitute For Return (SFR) assessment is on an account. SFR adjustments are input with a Hold Code 4. The hold code freezes the credit from refunding or offsetting and will cause a transcript to generate (i.e., AM05, ST05 or AM–X05 ,etc.) for review.

  6. On carryover of a Net Operating Loss (NOL) or a Net Capital Loss

    1. The Statute function will request technical assistance or forward the case to Examination on all carryback or carryforward claims.

    2. The Accounts Management/Adjustment Function must resolve Form 1040X or 1120X cases filed for a carryback if it involves a two-part adjustment for credit/refund and at least one part is for a statute expired period that does not involve a carryback. See IRM 21.5.9,Carrybacks, for carryback claim processing.

    3. See IRM 25.6.1.10.2.8.1, Net Operating Loss (NOL) Carryback or Capital Loss Carryback, for the special period of limitations for carrybacks of a NOL or a Net Capital Loss provided by Section 6511(d)(2).

  7. The non-debtor spouse has a two year period to file the Form 8379 with the Service if the debtor spouse joint refund was timely filed and no formal disallowance letter (105C) was issued to the non-debtor spouse. For additional information on tax refund offsets, See IRM 21.4.6 5.8.9(4), Refund Offsets.

25.6.1.10.2.5.1.1  (10-01-2007)
Appeals Determinations

  1. When Appeals requests that the Statute team clear a payment currently located in the Excess Collection File for credit or refund to the taxpayer, the following information is required with the requested document:

    1. A written statement that sufficiently explains why the limitation period that allows amount to be credited or refunded is open.

    2. If the limitations period was suspended or extended, Appeals should include a statement that identifies when the suspension or extension period began and when it ended, and state why the limitations period was suspended or extended.

      Example:

      If the limitations period is suspended under section 6511(h) due to a financial disability of the taxpayer, Appeals should state when the disability began, whether it is ongoing, or when it ceased. The Statute team cannot request or review the proof Appeals relied on to determine that a rule applies that kept the period of limitations for claiming a credit or refund open; the quantity and quality of proof is a matter solely within the discretion of Appeals.

  2. In Collection Due Process cases under section 6320 or 6330 in which Appeals considers the underlying tax liability, Appeals may determine that the taxpayer made an overpayment. If Appeals asks the Statute team to approve a credit or refund, the procedures stated in paragraph (1) above, will apply.

25.6.1.10.2.5.2  (10-01-2012)
Submission of Additional Information Necessary to Make a Determination on the Claim After the RSED

  1. If a claim was received before the RSED, additional information was requested to process the claim and the taxpayer submits the information after the RSED but within 45 days of the IRS request, then allow the claim. Use a response date that reflects local experience with late responses and misrouted mail. If the request for additional information is not received within the response date requested and the RSED has expired, disallow the claim.

    Note:

    However, if the taxpayer submits the requested information after the response date, but before the claim is disallowed the information needs to be considered since it was a timely filed claim.

  2. Even though the Service requests the information be provided in a certain number of days and needs the information to substantiate the claim, a claim is not disallowed until the Service provides a final disallowance notice as described below, or the taxpayer executes and files a Form 2297, Waiver of Statutory Notification of Claim Disallowance.

  3. Allow taxpayer correspondence received after the RSED that corrects a math error notice to adjust a previous math error provided that no formal notice of claim disallowance was previously issued by either certified/registered mail. If a notice of claim disallowance was previously issued, follow normal claim disallowance procedures.

25.6.1.10.2.5.3  (04-01-2006)
Notification to Taxpayer Upon Disallowance of a Claim

  1. Do not allow a claim for refund if the RSED has expired, even if the claim contains an issue that the taxpayer has a right to appeal. Issue a certified Letter 105C, Claim Disallowed, to the taxpayer. Input a TC 290.00 amount, using Blocking Series (BS) 98 or 99, as appropriate.

  2. Taxpayer’s Period of Limitations for Filing a Refund Suit. The two-year period of limitations for filing a refund suit under IRC Section 6532(a) does not begin until the Service sends a notice of claim disallowance unless the taxpayer executes and files a Form 2297, Waiver of Statutory Notification of Claim Disallowance, which would start the two-year period.

    Note:

    To start the IRC Section 6532(a) period, a notice of claim disallowance must unequivocally state that the claim was disallowed. See Letter 105C Claim Disallowed, or Letter 106C Claim Partially Disallowed. A math error notice is not a final notice of claim disallowance.

    Note:

    Although the notice must be sent by certified or registered mail, the Service takes the position that the period for filing suit begins if the Service mails a notice by regular mail where the taxpayer admits receipt or the Service can prove that the notice was received in a timely manner. See IRM 25.6.1.6.2, Identifying Undeliverable Mail, if the 105C letter is undeliverable, for more information.

  3. A notice of a claim disallowance is not mandatory. The Service may make a business decision not to send a notice of claim disallowance in every situation even though the taxpayer’s period for filing a refund suit remains open; e.g., if the Service denies an Earned Income Tax Credit (EITC) and issues a notice of deficiency, a taxpayer may file a Tax Court petition and the Court will have jurisdiction to redetermine the EITC. The Service may decide not to issue a notice of claim disallowance in this situation.

  4. A disallowance letter may be sent when the claim is untimely, as well as when the Service disagrees with the taxpayer’s position on a substantive matter; however, a "no consideration" letter is not a disallowance letter. A disallowance letter shows that the taxpayer satisfied the requirement in IRC Section 7422 that the taxpayer must file a claim with the Service before filing suit in a district court or the Court of Federal Claims.

25.6.1.10.2.5.4  (04-01-2007)
Reconsideration After the RSED Where Notice of Claim Disallowance Not Sent

  1. The Service may have fully considered a claim, decided to disallow it, and entered the disallowance on Master File, but did not send a notice of claim disallowance. Until a notice of claim disallowance described above is sent, the taxpayer’s two-year period of limitations for filing a refund suit does not begin to run regardless of how many years have passed. The Service may consider supplemental information subsequently submitted by the taxpayer and allow the claim.

    Note:

    See IRM 25.6.1.10.2.6.4, Supplemental Claims, concerning whether additional information supplements a timely pending claim or constitutes an untimely new claim.

  2. Special handling is required when allowing adjustments on these cases. If, after reviewing a case, it's determined the taxpayer is entitled to a credit/refund, follow procedures below using Command Code ADJ54. An example may be tax law changes enacted after the RSED (i.e., KITA).

  3. On timely claims/amended returns received after the RSED:

    1. Input TC 29X with appropriate tax amount.

    2. Input applicable notice/hold codes.

    3. Input the received date (postmark date, if timely mailed) of the taxpayer’s claim amended return in the "RFSCDT" field.

    4. Input Override Code "S" in the "OVERRIDE CD." field.

    5. Issue a manual refund (apply any offsets if applicable) for the requested amount.

    6. Monitor case until tax adjustments have posted and account is in zero balance.

  4. If allowing math error substantiations, input the received date of the original return (not the received date of the math error substantiation) in the "RFSCDT" field on ADJ54 on a timely filed original return. If the original return was not timely filed that contains the math error, you must correct the math error as stated above, but use a hold code to prevent the refund from going out. Also, send the taxpayer a disallowance letter (105C) if one has not already been sent and move overpayment to XSF.

25.6.1.10.2.5.5  (04-01-2006)
Reconsideration of a Disallowed Claim

  1. Although a claim may be reconsidered after the issuance of a final notice of claim disallowance described above, any reconsideration or action by the Service will not operate to extend the period within which suit may be begun. Therefore, if the taxpayer provides additional information substantiating the claim after issuance of a final notice of claim disallowance do not reconsider the claim unless:

    1. Time remains in the taxpayer’s two year period of limitations for filing a refund suit under IRC Section 6532(a), or

    2. The taxpayer has timely initiated a refund suit, which is still pending.

      Note:

      The Service and the taxpayer may consent to extend the two year period before it expires using Form 907, Agreement to Extend the Time to Bring Suit.

  2. If the taxpayer sends additional information after the two year period has expired above, see IRM 21.5.3.4.6.2(2), Appeals and Responses to Letter 105C/106C, on how to process.

25.6.1.10.2.5.6  (05-17-2004)
Claims Based Upon an Untimely Assessment

  1. This section provides procedures for processing claims based upon an untimely assessment.

25.6.1.10.2.5.6.1  (04-01-2007)
Claim for an Amount Paid Before the ASED

  1. A taxpayer is not entitled to a refund of an advance payment on the grounds that it was not timely assessed if the taxpayer would otherwise owe that amount. See Rev. Rul. 85-67, 1985-1 C.B. 364, distinguishing Rev. Rul. 74-580, 1974-2 C.B. 400.

  2. The Service must assess the tax, including the tax shown on a return, to collect the amount. A taxpayer, however, is only entitled to a refund if the taxpayer has in fact overpaid the tax for the year. See IRC Section 6402. See Lewis v. Reynolds, 284 U.S. 281 (1932) (all adjustments that increase or decrease taxable income, even those barred by the period of limitations, must be taken into account in determining the amount of an overpayment of tax).

  3. If the payment was erroneously refunded to the taxpayer, the refund can be recovered by using the Erroneous Refund procedures. IRM 25.6.1.10.2.3.1, Recovery of Assessable Erroneous Refund, which states that the Service may file a civil suit per IRC Section 7405 by the ERSED and per IRM 3.17.80.1.5 (3), Methods Used to Recover Erroneous Refundsin order to recover the erroneous refund.

  4. If the refund is stopped, is returned as an undeliverable, or is offset to another balance due account, the payment must be returned to the original barred assessed account and applied to the Excess Collection File. If the refund was applied to another balance due, send a letter to the taxpayer explaining the action taken and why the balance on the account is still owed.

25.6.1.10.2.5.6.2  (10-11-2012)
Claim for an Amount Paid After the ASED

  1. If an amended return is filed after the expiration of the period of limitations on assessment, any amount paid with that return must be refunded to the taxpayer. The taxpayer does not need to file a claim for refund in order to receive a refund of the payment made with the late filed amended return for additional tax assessment.

25.6.1.10.2.5.7  (10-01-2010)
Offsetting the Amount of a Refund With a Time-barred Adjustment

  1. If a taxpayer presents a valid claim for refund, the Service may net out the amount requested with adjustments for which the ASED has passed, so long as the refund involves the same taxpayer and the same tax period. Move the unassessable portion to XSF. See IRM 25.6.1.10.2.5.6.2, Claim for an Amount Paid After the ASED, above for more information.

  2. Limitation. See CCDM 34.5.2.4.2.2, Setoff Defenses.

    Note:

    The tax on self-employment income (SECA tax) and the individual income tax are treated as the same type of tax for this purpose. See Rev. Rul. 82-185, 1982-2 C.B. 395 (the filing of a Form 1040 starts the period of limitations on assessment for the SECA tax).

  3. Taxpayer’s Offsets. If substantiated, a taxpayer may offset the Service’s adjustments with deductions for which the RSED has passed.

25.6.1.10.2.6  (05-17-2004)
Claims for Credit or Refund - Form and Content

  1. This section provides details on the form and content for claims for credit or refund.

25.6.1.10.2.6.1  (05-17-2004)
Background on the Acceptability of Claims Failing to Comply with Prescribed Requirements for the Content and Form

  1. Requirements Prescribed by the Service. Treas. Reg. Section 301.6402-2(b)(1) provides that a 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. The statement of the grounds and facts must be verified by a written declaration that it is made under penalties of perjury. A claim which does not comply with this requirement will not be considered for any purposes as a claim for refund or credit. Treas. Reg. Section 301.6402-3 prescribes special rules applicable to claims related to income tax.

  2. Claims Made on Original Tax Return. A return filed on the form prescribed by Treas. Reg. Section 301.6402-3 that constitutes a valid return under the Beard standard generally meets the requirements of Treas. Reg. Section 301.6402-2(b). The Beard standard is as follows: First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury. See Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986).

  3. Court-Created Informal Claim Doctrine. In the past, courts have stated that the Service may insist upon full compliance with the regulations governing refund claims and may reject a refund claim that fails to satisfy the requirements of the regulations. See Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945). The informal claim rule (discussed at IRM 25.6.1.10.2.6.3 , below), however, makes it clear the Service cannot insist on a claim being filed on the prescribed form (at least when the claim includes an adequate written component and meets the other requirements noted below). The ongoing development of the informal claim rules leaves it uncertain in some cases whether the taxpayer has included sufficient detail regarding the grounds and facts of a claim. If a claim fails to present sufficient detail, it may be rejected for failure to meet the requirements of IRC Section 6402. The taxpayer (absent corrective action as described for informal claims) would then be barred from filing a refund suit, because IRC Section 7422 requires the taxpayer to file a claim that meets the requirements of IRC Section 6402 before bringing suit.

    Note:

    Courts have stated that the Service may be deemed to have waived any defects by considering a defective claim filed before the Refund Statute Expirations Date (RSED) but, be aware, the Service may not consider a claim that is filed after the RSED.

  4. Treatment of Claims with Insufficient Detail. If the detail is insufficient to consider a claim and the taxpayer fails to provide the additional information requested, but there is uncertainty as to whether the insufficiency is enough to warrant that the claim be rejected as deficient, the Service may simply disallow the claim. See IRM 25.6.1.10.2.5.2 , Submission of Additional Information Necessary to Make a Determination on the Claim after the RSED, at (1) above.

    Note:

    If a claim appears to be so deficient that it could be rejected for not meeting the requirements of IRC Section 6402 and the taxpayer fails to perfect the claim before the RSED, the claim may, nevertheless, be disallowed rather than rejected. Thus, by disallowing rather than rejecting the claim, the Service is treating the claim as one that is sufficient for purposes of IRC Section 7422 and the taxpayer may bring a refund suit.

25.6.1.10.2.6.2  (05-17-2004)
Forms for Submitting a Claim

  1. This section describes the forms used for submitting a claim.

25.6.1.10.2.6.2.1  (04-01-2007)
Claim on Original Tax Returns.

  1. An original income tax return is a claim for refund for the amount of overpayment shown on the return and may provide a line for claiming a credit or refund.

25.6.1.10.2.6.2.2  (09-12-2014)
Prescribed Forms for Amending an Original Tax Return or Abating a Penalty Already Paid

  1. Income Tax. Individual income tax claims are made on Form 1040X,Amended U.S. Individual Income Tax Return ; corporate income tax claims on Form 1120X, Amended U.S. Corporation Income Tax Return; a fiduciary claims an estate’s or trust’s income tax on Form 1041, U.S. Income Tax Return for Estates and Trusts (by checking a box at the beginning of the form).

  2. Estate Tax, Gift Tax, Excise Tax and Certain Penalties and Interest. Form 843,Claim for Refund and Request for Abatement, is the general form for claiming a refund (except in the case of fuel taxes and certain excise taxes for which Form 8849,Claim for Refund of Excise Taxes, is provided). Employment Tax is filed on the X form to which the original return relates (i.e., Form 941-X, Form 944-X and Form 945-X).

  3. Examination Adjustments Shown on Form 870 or Form 890. A taxpayer’s agreement to an overassessment of income, estate, or gift tax determined by the Service is considered a valid claim for credit or refund of any overpayment of tax attributable to the overassessment. The grounds upon which the overassessment was determined by the Service shall be considered the basis of the claim. See Rev. Rul. 68-65, 1968-1 C.B. 555 and Form 870, Waiver of Restrictions on Assessment & Collection of Deficiency in Tax & Acceptance of Overassessment, or Form 890,Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment - Estate, Gift, and Generation - Skipping Transfer Tax.

    Note:

    The execution of Form 870 or Form 890 and the placing of the agreement in the administrative file does constitute the filing of the claim. The signing of Form 870 or Form 890 by the taxpayer constitute the proof to show the timely mailing is timely filing under rule of IRC Section 7502.

25.6.1.10.2.6.3  (10-01-2007)
Informal Claims

  1. The requirements for an informal claim are as follows: An informal claim must have a written component apprising the Service that a refund is sought and describe the legal and factual basis for the refund so that the Service may investigate the claim.

  2. Investigation of an informal claim is fact intensive. The investigation may require an extensive analysis of the facts, and assistance from field counsel may be needed. In particular, courts have differed on the degree of detail that is required for a written component to be sufficient.

    Note:

    Informal claims requiring an extensive analysis of the facts relating to the presentation of the claim often arise during the examination cycle of a large taxpayer when a revenue agent is given a document oral or information purporting to be a claim.

    Note:

    The Court of Federal Claims has held that a contemporaneous writing created by Service personnel from the taxpayer’s oral statements may be the written component of the taxpayer’s claim. See New England Elec. System v. United States, 32 Fed. Cl. 636 (1995). Please contact Chief Counsel (Procedure and Administration) concerning the present treatment of such circumstances.

25.6.1.10.2.6.4  (05-17-2004)
Supplemental Claims

  1. Supplementing a Pending Claim Versus Submitting a New Claim.

    1. A supplemental claim cannot require the investigation of facts or legal positions that would not have been disclosed by the investigation of the original claim.

    2. Examples. (i) New Facts. A claim filed after the expiration of the RSED to add additional workers to a timely claim for a tax credit for hiring workers involves new facts and constitutes an untimely new claim, provided the additional individuals were not related to the earlier claim.

    3. (ii) New Legal Position. Where a timely claim asserts that certain income is nontaxable, a claim filed after the expiration of the RSED asserting that income, if taxable, was overstated, involves a new legal position and constitutes an untimely new claim.

  2. Perfecting an Informal Claim after RSED

    1. A taxpayer may perfect an informal claim after the RSED if the Service has not taken final action on the claim. Once the Service takes final action on the original claim, there is no longer any claim left to perfect.

      Note:

      For purposes of starting the two year period provided in IRC Section 6532(a) for filing suit in a refund court, a final action disallowing a claim does not occur until the notice of claim disallowance is sent. See IRM 25.6.1.10.2.5.3, Notification to Taxpayer Upon Disallowance of a Claim, for credit or refund is sent.

    2. Exception Where the Service’s Final Action Was Insufficient. There is a narrow exception to the rule concerning the effect of the Service’s disallowance of a claim. The disallowance will not constitute final action if the Service did not fully consider all grounds for the refund and the taxpayer asks for "reconsideration" of those grounds. Bemis Bros. Bag Co. V. United States, 289 U.S. 28 (1933) (the Service overlooked two independent grounds for the claim).

      Note:

      Overlooking a ground in the claim for refund is not the same as making an incorrect determination regarding the facts or law of a claim; e.g., the taxpayer claims overpayment interest as part of a refund claim and later discovers that the Service’s interest computation was incorrect. A claim based on the recomputation of underpayment interest is a new claim and not a supplement to the initial claim. The taxpayer must bring any error in the method of calculation to the Service’s attention. See Mobil Corp. v. United States, 52 Fed. Cl. 327 (2002).

      Note:

      There is another exception only for cases appealable to the Eleventh Circuit based on Mutual Assurance, Inc. v. United States, 56 F.3d 1353 (11th Cir. 1995), nonacq., 1999-41 I.R.B. 495, action on dec., 1999-014 (October 12, 1999). The taxpayer made a computational error when filing the original claim. The Service did not notice the taxpayer’s error when processing the original claim, but discovered it upon a subsequent examination. The Eleventh Circuit found that the original claim provided the Service with all the information it needed to accurately compute the correct amount of the refund.

25.6.1.10.2.6.5  (05-17-2004)
Protective Claims

  1. Protective claims are filed to preserve the taxpayer’s right to claim a refund when the taxpayer's right to the refund is contingent on future events and may not be determinable until after the statute of limitations expires. See IRM 21.5.3.4.7.3, Protective Claims. A protective claim is based on an expected change in the tax law, other legislation, regulations, or case law.

  2. A claim should not be viewed as a valid claim merely because the taxpayer labels it as such. See Nucorp, Inc. v. United States, 23 Cl. Ct. 234, 235 (1991) (Footnote 3 provides "Nothing can be found in the Code, regulations or case law relative to the efficacy of filing a ‘protective claim.’ Ostensibly, plaintiffs used the term ‘protective claim’ for descriptive purposes only" ). A valid protective claim need not state a particular dollar amount or demand an immediate refund; however, the claim must identify and describe the contingencies affecting the claim; must be sufficiently clear and definite to alert the Service as to the essential nature of the claim; and must identify a specific year or years for which a refund is sought.

  3. The Service has discretion in deciding how to process protective claims. In general, it is in the best interests of the Service and taxpayers to delay action on protective claims until the pending litigation or other contingency is resolved. Once the contingency is resolved, the Service may obtain additional information necessary to process the claim and then allow or disallow the claim.

25.6.1.10.2.7  (05-17-2004)
Claims for Credit or Refund – General Time Period for Submitting a Claim

  1. The period for filing a claim for credit or refund has two prongs:

    • First, a date by which a claim must be filed with the Service, and

    • Second, a limitation on the amount that may be claimed that is determined by "looking back" from the date of the claim to an earlier payment date.

  2. The following chart will help you in determining general claim rules governing a refund claim:

    RETURN FILED CLAIM FILED MAXIMUM AMOUNT OF REFUND OR CREDIT ALLOWABLE
    On or before due date Within 3 years from due date of return Tax paid during the period immediately preceding filing of claim equal to 3 years plus any extensions of time for filing. Section 6511(b)(2)(A). Advance payment is considered as being made on due date. Section 6513(a).
    On or before due date More than 3 years from due date of return Tax paid during the 2 years immediately preceding filing of claim. Section 6511(b)(2)(B).
    On or before due date None If allowance within 3 years from due date of return--credit or refund is limited to the amount of tax paid during the 3 years immediately preceding such allowance. Section 6511(b)(2)(C). If allowance more than 3 years from due date of return--credit or refund is limited to the amount of tax paid within 2 years immediately preceding such allowance. Section 6511(b)(2)(C). Advance payment is considered made on due date. Section 6513(a).
    After the due date It is within 3 years from filing of return Tax paid during the period immediately preceding filing of claim equal 3 years plus any extensions of time for filing can be refunded. Section 6511 (b)(2)(A).
    After the due date It is more than 3 years from filing of the original return Tax paid during the 2 years immediately preceding filing of claim can be refunded. Section 6511(b)(2)(B).
    After the due date None Tax paid during the period immediately preceding filing of the return equal to 3 years plus any extensions of time for filing.
    None (e.g., deficiency assessment) Within 2 years from the date the tax was paid Tax paid during 2 years immediately preceding filing of claim. Section 6511(b)(2)(B).
    None (e.g., deficiency assessment) None Tax paid during the 2 years immediately preceding allowance. Section 6511(b)(2)(C).

25.6.1.10.2.7.1  (05-17-2004)
Filing With the Service (First Prong)

  1. A claim credit or refund described above, must be filed by the later of two periods:

    • Three years from the filing of the original tax return, or

    • Two years from the payment of tax.

    Note:

    See IRM 25.6.1.6.15, When a Document Is Treated As Filed Under the IRC, for the rules for determining when a return is filed. A taxpayer is not considered to have filed a tax return until the taxpayer files a valid tax return. See IRM 25.6.1.6.14, Criteria for Establishing a Statute of Limitations Period, for information on filing a valid tax return.

25.6.1.10.2.7.1.1  (05-17-2004)
Start of the Filing Period Under the Three-year Rule

  1. The filing date of the original return generally should have been entered in the taxpayer’s account in accordance with processing procedures for tax returns (e.g., IRM 3.11.3, Individual Income Tax Returns). See IRM 25.6.1.6.15, When a Document Is Treated As Filed Under the IRC, for the rules in determining the filing date entered on the taxpayer's account.

25.6.1.10.2.7.1.2  (05-17-2004)
Start of the Filing Period Under the Two-year Rule

  1. The payment date should generally be entered on the taxpayer’s account in accordance with processing procedures under various IRMs. The dating should reflect the application of the rules for timely payments and credits, and when to send payments or credits to Excess Collection File (XSF) and Unidentified Remittance (URF).

25.6.1.10.2.7.1.3  (05-17-2004)
End of the Filing Period

  1. In general, a claim is filed on the date that it is received at the place designated for filing by the Service. See IRM 25.6.1.6.15, When a Document Is Treated As Filed Under the IRC, for the rules that may create a different filing date. The timely mailing rule and the Saturday, Sunday, and Legal Holiday (SSLH) rule may make a claim with a stamped received-date after the RSED timely. Also, the hand-delivery of a claim to a revenue agent who is examining the taxpayer’s returns may constitute the filing of a claim.

25.6.1.10.2.7.1.4  (10-01-2009)
Examples for the Three-year Period

  1. A 2005 individual income tax return received on April 18, 2006, but postmarked on April 14, is deemed filed on April 15, 2006. A claim for refund filed on Monday, April 18, 2009, is not timely.

  2. A 2005 individual income tax return received on Friday, April 14, 2006, is an early filed return that is treated as filed on April 15, 2006. A claim for refund filed on Thursday, April 16, 2009, is not timely filed. The SSLH rule that applied to some 2005 returns, does not apply because the taxpayer’s return was not filed on the next succeeding day (i.e., Monday, April 17, 2006). See Rev. Rul. 2003-41, 2003-1 C.B. 814.

  3. A claim filed on a delinquent original income tax return that is postmarked on the last day of the three-year period, is deemed to be filed on the postmark date. See Weisbart v. United States, 222 F.3d 93 (2d Cir. 2000), acq. 2000-2 C.B. xiii, 2000-09 (Nov. 13, 2000).

25.6.1.10.2.7.2  (05-17-2004)
Limitations on the Amount of a Claim

  1. This section describes procedures regarding the limitations on the amount of a claim.

25.6.1.10.2.7.2.1  (10-01-2013)
Three-year Rule

  1. The amount to be credited or refunded is limited to the tax paid (which includes tax, penalties, and interest) during the three year period prior to the filing of the claim, plus the period of any extension of time to file.

  2. Here are a few examples on the limitations on the amount of a claim regarding the three-year rule.

    Example:

    (a). An original delinquent return claiming a refund is filed three years and one month after the Return Due Date. The return due date is the start date of the refund filing date limitation period. The amount of any refund is limited to payments made within the three-year period immediately preceding the filing of the delinquent return/claim. Withholding credits and estimated tax payments are deemed to be paid on the Return Due Date (without regard to any extension of time to file). Therefore, the withholding credits and estimated tax payments may not be refunded. If no other payment has been made within the 3 year time period described above, no credit or refund should be allowed. See Rev. Rul. 76–511, 1976–2 C.B. 428.

    Example:

    (b). Same as Example (a) except the taxpayer had received an extension of time to file. You must determine the lookback period as it relates to the extension of time to file on the account to see if the withholding credits would be refunded based on the length of the extension period on the account.

    Example:

    (c). A 2008 individual income tax return is filed on April 15, 2009. A claim for refund filed on Tuesday, April 17, 2012, is treated as timely filed under the Saturday, Sunday and Legal Holiday (SSLH) rule. The claim is treated as if it is filed on the last day otherwise prescribed for filing, which is April 15, 2012; otherwise, the SSLH rule would give no benefit. See Rev. Rul. 66-118, 1966-1 C.B. 290.


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