IRS May Restrict Informal Refund Claims for LB&I Taxpayers Under Exam

Today’s guest poster is Rachel Partain.  Rachel is of counsel at Caplin & Drysdale, Chtd. in New York, NY and her practice involves tax controversy matters for corporations, partnerships, and individuals.  Rachel was formerly an associate at Dewey & LeBoeuf LLP and a 2012-2013 Nolan Fellow of the ABA Section of Taxation.  In this post, Rachel explores a proposed change relating to refund claims for LB&I taxpayers.  Steve.

LB&I is considering sharply curtailing the ability of LB&I taxpayers under examination to submit informal refund claims and will be seeking comments on a claim cutoff from external stakeholders.  As informal claims are very common in LB&I (and other) examinations, there likely will be significant feedback to LB&I’s proposal.

On November 10, 2014, the IRS made available a draft of Publication 5125 dated as of July 2014 relating to the LB&I quality examination process.  See 2014 TNT 217-62 (Nov. 10, 2014).  Among other things, the publication indicates that LB&I is considering reducing the period in which taxpayers may submit informal claims to within 30 days after the examination opening conference.  After the expiration of the 30 day period, LB&I taxpayers would be required to submit documented and supported formal refund claims on Forms 1120X or 843 and, presumably, administrative adjustment requests for TEFRA partnerships and Form 1040X for Global High Wealth taxpayers.  Currently, LB&I asks that taxpayers submit refund claims, formal or informal, as soon as possible.  See I.R.M.  In practice, it is common for exam to establish a deadline for the submission of informal claims.  LB&I’s proposal would apply an informal claim period uniformly to all LB&I taxpayers.

The Code furnishes the time in which refund claims must be filed.  See I.R.C. § 6511. The regulations provide additional requirements that refund claims must satisfy, including that claims must be filed on a tax return or Form 843.  See Treas. Reg. §§ 301.6402-2, -3.  Numerous court decisions have held that informal claims constitute valid refund claims, despite the requirements in the regulations.  An informal claim is any written document that provides the IRS with notice that the taxpayer is claiming a refund and the grounds for the taxpayer’s claim, and generally is not submitted with tax computations.  See Mobil Corp. v. Unites States, 67 Fed. Cl. 708 (2005).  There is precedent addressing informal claims in the context of an exam-imposed cutoff.  For example, in Mobil, the exam team set a date certain by which informal claims were to be filed.  The court held that the IRS has the ability to require taxpayers to follow the refund claim regulations, with the result being that one of the taxpayer’s informal claims submitted after the informal claim deadline did not constitute a valid refund claim.  As a result, under the proposed change and Mobil, LB&I taxpayers would be precluded from asserting that a submission to exam after the period for filing informal claims has elapsed constitutes an informal refund claim.


The draft publication states that the purpose of informal claim end point is to “deploy resources efficiently.”  LB&I’s industry director of natural resources and construction stated that LB&I taxpayers submit a significant number of informal claims and that the informal claims impede the examination of issues identified on LB&I exam plans.  See 222 DTR G-2 (Nov. 18, 2014).  The publication indicates that LB&I wants taxpayers to submit fully documented and supported refund claims, which would enable exam teams to make determinations on refund claims without engaging in a lengthy examination process.  In fact, the LB&I Commissioner has publicly stated that exam will no longer be developing refund claims and instead will reject claims that are not fully developed.  See 2014 TNT 217-2 (Nov. 10, 2014).

Also, the LB&I document states, without explanation, that late informal refund claims “may result in unnecessary refund litigation.”  Perhaps the later an informal claim is filed, the more likely exam is to reject the claim in order to focus on wrapping up the examination.

It has been suggested that another purpose for LB&I’s proposed informal claim window may relate to the section 6676 penalty for erroneous refund claims.  However, the IRS’s position is that the penalty applies to both formal and informal claims.  See I.R.M.  Therefore, the penalty may not be a driving factor behind LB&I’s proposal to require the filing of formal claims that otherwise would have been submitted as informal claims.

The LB&I Commissioner also announced that refund claims will be risk assessed, which means that claims will be preliminarily reviewed to determine whether to allow the claim or to initiate an examination of the issues raised in the claim.  See 2014 TNT 217-2.  LB&I’s considerations during risk assessment include the materiality of the issues in the claim, the time and resources needed to examine the issues and whether the issues in the claim may affect future years.  See I.R.M.

The effect of an informal claim cutoff would be to shift the development and computation of claims more fully to taxpayers.  If implemented, the policy may result in an LB&I taxpayer delaying the filing of a formal claim until the end of the examination.  This would permit the submission of a comprehensive claim covering all of the taxpayer’s issues and their grounds and alternative grounds, and would require the taxpayer to prepare tax computations only once.  Where taxpayers submit formal claims towards the end of the refund limitations period, taxpayers will be under greater pressure, given the variance doctrine, to submit full and complete claims explaining all possible grounds for the taxpayer’s recovery as taxpayers will have a shorter window within which they can timely correct defective claims with amended or superseding claims.  Further, a formal claim requirement may deter taxpayers from filing smaller dollar amount claims if the time and expense of amending the return is more than the value of the refund claim.

Also, a policy limiting the period in which taxpayers may submit informal refund claims may lead to less collaboration between taxpayers and exam, which relationship has already become more formalized as a result of the recent changes to the LB&I information document request procedures.  See., e.g., LB&I-04-0214-004 (Feb. 28, 2014).

Given the IRS’s resource limitations resulting from budget constraints and exam’s objective of adhering to the LB&I exam timeline, it seems likely that LB&I will adopt an informal claim window.  However, many practitioners feel that 30 days is too short of a period.  I would expect an enlargement of the period in which LB&I taxpayers will be permitted to submit informal claims.  A more reasonable period would be at least 90 days, and perhaps a longer timeframe for TEFRA partnerships as opposed to other LB&I taxpayers.

Although the publication is in draft form and LB&I has not issued a notice announcing the proposed changes, it appears that LB&I has already determined that action should not be taken on late-raised informal refund claims.  I have seen LB&I exam respond to informal claims by directing the taxpayers to submit formal refund claims, or an administrative adjustment request in the case of a TEFRA partnership.