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.

 

A Ghost Preparer Story

 

I came across a ghost preparer last week.

I rarely see that.

A ghost preparer is someone who prepares a tax return for compensation (me, for example) but who does not sign the return.

This is a big no-no in tax practice. The IRS requires all paid tax preparers to obtain an identification number (PTIN, pronounced “pea tin”) and disclose the same on returns. The IRS can track, for example, how many returns I signed last year via my PTIN. There are also mandates that come with the CPA license.

Why does the ghost do this?

You know why.

It started with a phone call.

Client: What do you know about the employee retention credit?

Me: Quite a bit. Why do you ask?”

Client: I had someone prepare refunds, and I want to know if they look right.”

You may have heard commercials for the ERC on the radio These credits are “for up to $26,000 per employee” but you “must act now.”

Well, yes, it can be up to $26,000 per employee. And yes, one should act soon, because the ERC involves amending tax returns. Generally, one has only three years to amend a return before the tax period closes. This is the statute of limitations, and it is both friend and foe. The IRS cannot chase you after three years, but likewise you cannot amend after the same three years.

The ERC was in place for most of 2020 and for 9 months of 2021. If you are thinking COVID stimulus, you are right. The ERC encouraged employers to retain employees by shifting some of the payroll cost onto the federal government.

Me: I thought you did not qualify for the ERC because you could not meet the revenue reduction.” 

         Client: They thought otherwise.”

         Me: Send it to me.”

He did.

I saw refunds of approximately $240,000 for 2020. I also remember our accountant telling me that the client could not meet the revenue reduction test for 2020. Revenues went down, yes, but not enough to qualify for the credit.

COMMENT: There are two ways to qualify for the ERC: revenue reduction or the mandate. The revenue reduction is more objective, and it requires a decrease in revenue from 2019 (50% decrease for the 2020 ERC; 20% decrease for the 2021 ERC). The second way – a government COVID mandate hobbling the business – does not require revenue reduction but can be more difficult to prove. A restaurant experiencing COVID mandates could prove mandate relatively easily. By contrast, a business experiencing supply-chain issues probably experienced COVID mandates indirectly. The business would likely need its suppliers’ cooperation to show how government mandates closed their (i.e., the suppliers’) doors.

I had our accountant locate the 2020 accounting records. We reviewed the revenue reduction.

The client did not make it.

I called.

Me: Did they say that you qualified under the mandate test?"

         Client: They said I qualified under revenue reduction."

         Me: But you don’t. How could they not tell?"

         Client: Because they never looked at it."

         Me: Then how ….?"

Client: They asked if I had a revenue decline and I said yes. They took my answer and ran with it."

Why would someone do this?

Because that someone works on commission.

There is incentive to maximize the refund, whether right or not.

I was looking at a refund of almost a quarter million dollars.

That would have been a nice commission.

No, the client is not filing those amended returns. He realized the con. He also realized that he had no argument upon IRS audit. He would have to return the money, plus whatever penalties they would layer on. I could no more save him than I could travel to Mars.

He now also understands why they never signed those returns.

Ghosts.