About The Statute Of Limitations On Refund Claims And Correcting The Record

A helpful consideration of certain core "income" tax dynamics

Q.  What are the legal statutes of limitation, if any, for filing a corrected federal tax return? If open ended, could that mean all previously filed returns by someone engaged in private sector activities are fair game?

A.  First, understand that the phrase "corrected return" is likely to contribute to poor communication, or fuzzy thinking.  To clarify:  The first return filed by the individual with whom it is concerned is an "original return", no matter how late it is filed.  Any subsequent return filed concerning the same period is an "amended return", not a "corrected return".

(However, if the "original return" filed was actually invalid-- as opposed to merely declared "frivolous" in the sort of IRS ploy discussed here-- the filing will be considered a legal nullity, meaning that the return will not be considered to have ever been filed at all.  In such cases, the first subsequent return filed by the same individual will then be the "original return"-- and should be done on an "original return" form...

In the same vein, it will be important for many to understand that a nominal "Substitute For Return" (SFR) which the IRS may use in regard to a normal annual filer IS NOT A RETURN.  See 'About 1040s And Claiming Refunds' in CtC, and the following from a GAO response to an inquiry by Senator Daniel Moynihan:

(Nor is it an actual "Substitute for Return"... You'll note that I referred to it as a NOMINAL "Substitute for Return".)

Even after a SFR is alleged to have been created, the first return filed by the person concerned is still the original return, and should be done on an "original return" form-- not an "amended return" form.

“In Phillips v. Commissioner, supra at 437-438, we held that a "dummy return", i.e., page 1 of a Form 1040 showing only the taxpayer's name, address, and Social Security number, was not a section 6020(b) return.”

“The mere fact that respondent's files contain information upon which a tax might be determined does not transform his files into a section 6020(b) return. See Cabirac* v. Commissioner, 120 T.C. ----, (2003).”

“The dates which appear on the numerous documents that respondent alleged to be section 6020(b) returns do not match; indeed, the date entries span several years. We cannot agree that this conglomeration of documents, which appears to be respondent's administrative file, would satisfy the requirements of section 6020(b) even if it were in evidence. See Cabirac* v. Commissioner, supra.”

United States Tax Court, SPURLOCK v. CIR, No. 6438-01, April 29, 2003.

*See background on CtC Warrior Mike Cabirac's TC case, and his subsequent victory for the rule of law, here; and a related IRS OCC memorandum here.)

As to the "statute of limitations", it is certainly not "open-ended" regarding claims for the return of property (see the Digital Appendix for the relevant statutory text).  Summarizing that limitation as practically applied, the statutory look-back period can best be thought of as running for three years beginning (that is, running back from) the day a return would have been considered required (without consideration as to whether one could properly have been "required" in any particular case at all).  For instance, in order to claim the return of property withheld or paid-in in 2003, the return making the claim must be filed no later than April 15, 2007 (or August 15, 2007 if an application for extension had been filed by April 15, 2004).

The following language will help illuminate this:

"Internal Revenue Code §6511(b)(2)(A) imposes a ceiling on the amount of credit or refund to which a taxpayer is entitled as compensation for an overpayment of tax: "[T]he amount of the credit or refund shall not exceed the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return." 26 U.S.C. §6511(b)(2)(A)."

Baral v. United States, 528 U.S. 431 (2000)

and:

"Under 26 U.S.C. § 6511(b)(2)(A), Ehle may obtain by refund only those taxes paid within the three previous years. Under 26 U.S.C. § 6513(b)(1), any amount withheld from wages is deemed paid on the April 15th following the close of the tax year. Because Ehle's refund claim was filed more than three years after the amounts withheld in 1969-71 were deemed paid, the claim is barred by section 6511(b)(2)(A).”

Ehle v. United States, 720 F.2d 1096 (9th Cir. 1983)

(Note: At least two federal district courts have held that the look-back period is actually six years in the case of claims for the return of property which was not, in fact, paid-in as tax-- which would be true of anyone who had never characterized the receipts from which the withholding was done as being "income" by declaring it to be so on a return.

For instance, in Wachovia Bank v. United States, 95 AFTR 2d 2005-817, a Florida district court held that under certain circumstances a refund of erroneously paid taxes can be claimed for up to six years following payment, interpreting the three year statute of limitations (codified at 26 USC 6511) as only applying when a return was actually required. The court held that when a return was NOT required, the more general six-year limitation on civil actions against the United States applies.

This ruling did not address the question of whether establishing that a mere allegation of the receipt of "income" in an amount above the filing-requirement threshold was erroneous will trigger this exception-- I suspect that the default position of even this court would be in the negative. Nonetheless, this ruling offers a good deal of support to an argument on that point, and has to be placed in the "thumbs up" column.)

In light of these statutory look-back provisions, returns claiming refunds of amounts withheld or paid-in more than three (or at most six) years prior to the claim might well be called "frivolous" (as in, "having no basis in law")-- although NOT meeting the definition of "frivolous returns" subject to penalty under 26 USC 6702 for that reason.

NOTE: Lawsuits over amounts claimed for refund but not returned are subject to a two-year statute of limitations that begins running at the earlier of either the issuance of a formal "notice of disallowance" of the claim (with explanation-- see 26 USC §6402(k)) or after six months have passed without satisfaction since the filing of the claim (the 1040, etc.). See 26 USC §6532.

On the other hand, there is no statute of limitations of which I am aware on simply correcting the record. Thus, even when it is too late to claim a refund, there may still be a considerable benefit to filing, if one is being dunned for alleged, but erroneous liabilities and/or related penalties and interest. It is as certain as day following night that if the body of evidence on the record relating to any particular year were to change, any calculations, conclusions and claims being prosecuted by a tax agency based upon that body of evidence must also change...

Finally, another slight digression, as the subject of accuracy of terms related to this subject has already been broached above: While W-2's, 4852's, K-1's and 1099's are themselves technically 'returns' ("information returns"), clarity is best served by confining the use of the term 'return' to its conventional application, i.e. 1040's, etc.. (In the same vein, by the way, the various flavors of 1040s-- i.e. 1040x, 1041, etc.-- ARE NOT "information returns"...) Thus, call 1040s of any flavor "returns", and call W-2s, 1099s, K-1s ands so forth "information returns".

Find more FAQs of interest to anyone dealing with the tax here and here