The Potential Problems Taxpayers Face When Waiting Until the Last Minute to Timely File Amended Returns

Waiting until the last minute is nearly always a bad strategy. This is certainly true in tax preparation, whether it is preparing an original or amended tax return. For taxpayers seeking a refund from an amended return, in particular, there are potentially very serious problems for those who wait until the last minute to file.

The statutory period for filing an amended return is three years from the filing date. IRC § 6501(a). The chief problem in filing an amended return so close to the expiration of the statutory period for assessment is that procedural delays can affect the taxpayer’s ability to secure a refund that is the purpose of filing that amended return.

The IRS recently issued Chief Counsel Advice (CCA) 201252015 which described a situation where the IRS’s assessment of additional tax, resulting from taxpayers’ timely filed amended returns, was untimely. The taxpayers submitted their amended returns with payment in full, but, at a later date, realized those amended returns were incorrect. Upon discovering this, the taxpayers filed subsequent amended returns to reduce their liability and recover the overpayment. In the CCA case, the IRS determined that the amounts that the taxpayers paid with their original amended returns were not refundable overpayments because they did not exceed the amounts owed. The IRS decided they were not statutory overpayments because they were credited to the taxpayers’ account within the applicable limitations periods on assessment.

This is a nuanced issue. The taxpayers filed amended returns within the three year period under IRC § 6501(a). However, in instances like this one, where the filing occurs within 60 days of the expiration of that three year period, under IRC § 6501(c)(7) the IRS gets an additional 60 days from the date of filing to assess the additional amount.

In the CCA case, the IRS’s additional assessment did not occur in a timely fashion, even though the amended returns and corresponding payments were submitted prior to the expiration of the statutory period for assessment. The reason for the IRS’s delay was because the case was referred to the Criminal Investigation (CI) Division. Only after the CI Division had rejected the referral, were the additional assessments made. This is important because the United States Supreme Court, in Lewis v. Reynolds, 52 S.Ct. 145 (1932), held that no refund can be issued unless it is first determined that an overpayment occurred.

The IRS took the Lewis decision a little further in Revenue Ruling 85-67 , which stated that the expiration of the period of limitations does not bar the IRS from keeping payments that were already received and applied when those payments did not exceed the amount which might have been properly assessed and demanded. This Revenue Ruling also drew on the decision in Bull v. United States, 295 U.S. 247, 259 (1935), in which the United States Supreme Court held that the assessment of tax does not create the liability but merely acts as a judgment for taxes found due. Basically, if the IRS concludes a taxpayer should have paid the amount, even if the IRS did not yet know if it was owed or not owed the money, the IRS can still keep the funds it collected prior to expiration of the statutory period for assessments.

Even though the IRS has tried to clarify when they can and cannot retain a refund, there is still a lot of uncertainty. Please see Pacific Gas and Elec. Co. and PG & E Corporation v. United States, 417 F.3d 1375 (Fed. Ct. Claims 2005). There have been thousands of cases litigating this issue. That is why it is so important to submit amended returns that are meant to perfect potential claims for refunds long before the statute of limitations expires. This will help ensure that these potential complications are limited, if not avoided all together.