Just as there are statutes of limitation on assessment and collection taxes, there are also statutes of limitation on taxpayers claiming tax refunds from the Government. There are two applicable rules.
First, there is a statute of limitations for filing the claim for refund. A claim for refund must be filed within three years from the time the return was filed or two years from the date the tax was paid, whichever is later, and, if no return is filed, within two years from the date of payment. § 6511(a). Read literally, this means that a taxpayer can file a return 40 years late and qualify under this first rule. I hope readers will instinctively say something must be missing here, for statutes of limitations do not normally allow such lengthy lapses before the claim must be pursued. The answer to that concern is in the second rule to which I now turn.\
Second, there is a statute of limitations on the amount of tax that can be refunded if the claim is timely under the first rule. The IRS may only refund the amount of tax paid within three years plus the period of any extension and, if the foregoing rule does not apply, then it may only refund the tax paid within two years of the date of the claim. § 6511(b)(2).In my book, I use various examples to illustrate the application and interface of these limitations periods. I won't go through all of them now, but will address some that relate to a recent IRS internal guidance, ECC 201321022 (5/2/13), here. I provide the first four examples without the footnotes and then provide the fourth example with the footnote discussing ECC 201321022.
Example 1: The taxpayer files his Year 01 tax return on 4/15/02 and pays the indicated tax of $100. In January of Year 05, the taxpayer discovers he overpaid the Year 01 tax by $50. He may file a timely claim for refund any time on or prior to 4/15/05 and receive a full refund. He satisfies both rules.
Example 2: Assume the same facts, except for some reason, the taxpayer does not file the claim for refund until 6/01/05. Both of the rules would prohibit the IRS from granting the claim. First, he has not filed a claim for refund within the period provided in the first rule. Second, the amount he seeks to have refunded was paid beyond the three year period before the filing of the claim, as provided in the second rule.
Example 3: Assume the same facts except that the taxpayer received an extension to file the Year 01 return and files the return on 10/15/02. Under the first rule, the taxpayer will have until 10/15/05 to file a claim for refund and, under the second rule, he may recover the full refund because extension periods are added to the three year rule.
Example 4: Assume the same facts as Example 3 (most prominently a requested extension to 10/15/02 for the year 01 return), but the taxpayer files his original 01 return on 7/1/02 (that is the actual date the IRS receives it and files the 01 return). As noted elsewhere in the text the filing date for this return is 7/1/02. The three year claim for refund period ends 7/1/05. This follows inexorably from the statutory requirement that the claim be filed 3 years from the date of filing and the absence of any provision that treats a return filed during the extension period before the extended due date to be treated as filed on the extended due date. Specifically, from the statutory text, the taxpayer does not have until 10/15/05, the extended due date plus 3 years, to file the claim. Notwithstanding this analysis, the IRS may treat a claim filed by the extended due date for an original return filed before the extended due date as timely under the 3 year rule. [footnote] The better part of wisdom, however, would be to file the claim no later than 7/1/05.
[footnote] In exchanges on the Tax Prof List Serv on 6/23/10, the Tax Profs discussed the fact that the IRS instructions for filing a 1040X indicate that the 3 years is measured from the extended due date without any nuance for a return on extension filed prior to the extended due date. The IRS apparently recognizes that its computer systems are not up to the task of applying the complexity to recognize that the refund statute date closes in the example above on 7/1/05. See ECC 201321022 (5/2/13), reproduced at 2013 TNT 102-60 (5/25/13) (noting that, in this example, the IRS computers would key to the extended due date and generate a refund even if the refund claim is filed after 7/1/02). The IRS publication laments: “The section 6511 rules are so complicated that the system cannot currently be programmed to figure out every situation.” Other complexities are also addressed in ECC 201321022.