A Lesser Known Statute Of Limitations

The last time I checked, IRS Appeals personnel count was down by approximately 20% and – no surprise – getting a case through Appeals is taking over a year.

There is danger – and potentially an immediate one – to taxpayers and tax advisors.

Take a look at this cheerful composition:

26 U.S. Code § 6532 - Periods of limitation on suits

(1) General rule

No suit or proceeding under section 7422(a) for the recovery of any internal revenue tax, penalty, or other sum, shall be begun before the expiration of 6 months from the date of filing the claim required under such section unless the Secretary renders a decision thereon within that time, nor after the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates.

(2) Extension of time

The 2-year period prescribed in paragraph (1) shall be extended for such period as may be agreed upon in writing between the taxpayer and the Secretary.

(3) Waiver of notice of disallowance

If any person files a written waiver of the requirement that he be mailed a notice of disallowance, the 2-year period prescribed in paragraph (1) shall begin on the date such waiver is filed.

(4) Reconsideration after mailing of notice

Any consideration, reconsideration, or action by the Secretary with respect to such claim following the mailing of a notice by certified mail or registered mail of disallowance shall not operate to extend the period within which suit may be begun.

We see the following:

The IRS has 6 months to respond to a claim for refund. If no response is forthcoming within that time, the taxpayer can sue for refund, as long as the suit or proceeding occurs within the two-year period beginning with the date the IRS formally disallowed the claim.

What if the IRS never responds to the claim? Your tax advisor (CPA or attorney) will likely recommend you file suit within 2 years from filing the claim. If you file, a tax CPA will hand you off to a tax attorney. A tax CPA can do a lot, but one must be a member of the bar to litigate.

What happens if you miss the Section 6532 deadline?

Let’s look at this next artful arrangement:

26 U.S. Code § 6514 - Credits or refunds after period of limitation

(a) Credits or refunds after period of limitation

A refund of any portion of an internal revenue tax shall be considered erroneous and a credit of any such portion shall be considered void—

(1) Expiration of period for filing claim

If made after the expiration of the period of limitation for filing claim therefor, unless within such period claim was filed; or

(2) Disallowance of claim and expiration of period for filing suit

In the case of a claim filed within the proper time and disallowed by the Secretary, if the credit or refund was made after the expiration of the period of limitation for filing suit, unless within such period suit was begun by the taxpayer.

(3) Recovery of erroneous refunds

For procedure by the United States to recover erroneous refunds, see sections 6532(b) and 7405.

(b) Credit after period of limitation

Any credit against a liability in respect of any taxable year shall be void if any payment in respect of such liability would be considered an overpayment under section 6401(a).

Section 6514(a)(2) can be brutal: the IRS is prohibited from issuing the refund unless within such period suit was begun by the taxpayer.

Oh, this is all big corporate tax stuff, you say. Unless your name is Apple or Nvidia, can this ever reach you?

Yepper.

What if you filed for an ERC (employee retention credit) and (1) have never heard back from the IRS or (2) did hear back but the IRS disallowed the claim? The IRS has been using Letter 105C (if they disallowed the ERC claim in full) or Letter 106C (if they partially disallowed the claim). A 105C letter will include language like this:

         

There is the disallowance language that Sections 6532 and 6514 allude to.

When was the IRS sending out these letters?

After running ERC claims through a risk-scoring algorithm, the IRS sent out approximately 28,000 letters 105C and 106C during the summer of 2024. If the taxpayer responded (to the 105C or 106C), the IRS would then conduct an mini-audit before sending the file to Appeals.

2024 plus 2 years equals 2026 – your two-year statute of limitations is coming up.

Is there a way to avoid filing in Court but still preserve your rights to a refund?

Yes. Let’s go back to Section 6532(a)(2).

There is a form that goes with it.

  

Here is the Internal Revenue Manual on Form 907:

On first impression, I like the Form 907 option. What more do we need to know about it?

(1)  First, you are still within Section 6532, so this must be done within the 2-year window.

(2)  Both parties – you and the IRS – must sign Form 907.

(3)  If the case is being actively worked, the Revenue Agent or Appeals Officer can hopefully help obtain the appropriate IRS signature.

But what if the case is not being actively worked?

There are several ways this can happen:

·      The file is lost (I had one lost in IRS Kansas City a few years ago; it held up a real estate closing).

·      You are waiting for the protest to be transferred to Appeals.

·      The protest has been transferred to Appeals but remains unassigned.

·      The protest was transferred and assigned but your AO is no longer working at the IRS. It again is … unassigned.

·      You never even filed a protest to either Letter 105C or 106C.

The IRS considers Form 907 to be an internal form, to be initiated by IRS employees. If you have settled on Form 907 and your back is to the wall on obtaining an IRS signature, consider the Taxpayer Advocate.

But give yourself breathing room. I suspect that trying to obtain an IRS signature on short notice – whether actively worked or not, assigned or unassigned – will prove futile.

You might have to file suit to preserve the claim.

 

The IRS, Layla, Ludwig Drums and Demutualization

Well, this is not the easiest tax reading I have ever done. I just finished Cadrecha v U.S. The case is like reading a calendar.    

You ever wonder about the difference between a tax attorney and a tax CPA? There are differences in practice. The CPA of course is much more involved with numbers and the attorney is more so with contracts and documents. A big difference is that the attorney can take a case to court. Robert and Cynthia Cadrecha (Cadrecha) could have used an attorney, because the IRS beat on them like a set of Ludwig drums.

This case has to do with a life insurance company demutualization. Demutualization means the life insurance company issues stock. The IRS took the position that any stock received would have a basis of zero; a subsequent sale would therefore be all gain. Sounds like a position the IRS would take. There was a taxpayer who took the IRS to court on this matter (Fischer v U.S.) and won. Cadrecha occurred during this period of time.

Here goes:

4/15/04           Cadrecha files 2003 tax return showing no basis in the stock.

3/20/07           He learns of the Fischer case. Cadrecha mails amended return showing basis in the stock.

3/22/07           IRS receives amended return.

5/10/07           IRS writes letter asking for more information. Cadrecha provides it.

6/26/07           IRS sends letter that it is researching.

8/6/08             Fischer wins case against IRS.

8/13/07           IRS sends letter it fell asleep and will now really start researching.

8/31/07           IRS sends letter saying “fuhgetaboutit” and disallows the amended return.

The IRS, with all its efficiency, tells Cadrecha that they filed the amended return after three years had expired. This is of course incorrect. What happened is that the IRS got the 3/20/07 filing confused with the additional information provided on 5/10/07. Generally speaking, the additional information will be attributed back to the earlier filing.

OBSERVATION: This is why we recommend using certified mail.

NOTE: Something VERY important happens here. The disallowance is on Letter 105C, which includes the following language concerning an appeals or suit:

“The law permits you to do this within 2 years from the date of this letter. If you decide to appeal our decision first, the 2-year period still begins from the date of this letter.”

I believe that Cadrecha, and Cadrecha’s accountant, got mislead by the reason given on Form 105C. Granted, the amended return was filed within 3 years, but the claim was DISALLOWED.  This has significance separate and apart from any reason given and will come back to haunt Cadrecha.

8/31/07           Cadrecha sends a letter to the IRS disagreeing with the “dates” issue.

10/1/08           Cadrecha sends a letter to the IRS asking whether anyone is still alive.

11/3/08           Cadrecha files Form 843 in order to perfect the earlier (3/20/07) claim. (An amended return is a claim).

11/5/08           IRS responds to Cadrecha’s letter of 11/3/08, saying someone is still alive.

12/30/8           IRS – in a blur of motion – responds to the claim filed 11/5/08, saying it will need more time to research and to put the children through middle school.

1/15/09           The IRS writes again, stating that it is forwarding the claim filed 11/3/08 to Austin by the slowest means possible.

6/25/09           Cadrecha’s accountant contacts the Taxpayer Advocate.

12/11/09         Cadrecha’s accountant actually speaks to an IRS employee. She (the employee) explains that the IRS is delaying because it intends to appeal Fischer. She also says that the children are doing well and have started high school.

4/19/10           Cadrecha, in a moment of insanity, writes the IRS.

8/22/10           Cadrecha writes the Taxpayer Advocate imploring it to “PLEASE help.” Johnny Depp is rumored to be in consideration for the movie lead.

4/26/11           Cadrecha receives a letter from the IRS stating that their claim was “being held in suspense” while the IRS was litigating a similar demutualization case in Arizona. The IRS also remarked how the children had grown and were soon to start college.

Anyway, Cadrecha winds up in court. What did the IRS argue? That Cadrecha’s complaint was not filed timely! Can you believe the gall?

The court decided against Cadrecha. The case was not filed timely. Look back above and reread my comment on the 8/31/07 entry. Cadrecha had 2 years to file. Not 2 years and a day or 3 years less a week. He was late.

Is it equitable? Most likely not, but it was the bright-line law.

Is there a moral? Yes. When this issue got played out like Clapton’s “Layla,” Cadrecha needed an attorney. I know, I know. One does not have unlimited money to throw around, and one has to consider whether the amount of tax at issue is worth the additional cost. But Cadrecha needed something that a CPA could not provide: a court filing before the two years ran out.