IRS Still Allowed to Request Documents and Examine Other Issues With Claim for Refund, Even When Form 870-AD Previously Executed

The taxpayer and the IRS had executed a Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax Deficiency and to Accept Overassessment, with regard to particular year.  In Chief Counsel Email Advice 201152018 the IRS determined that even with the Form 870-AD, the IRS could still look at details of the year in question when the taxpayer later filed a claim for refund (likely due to a carryback) related to the year in question.

Generally the IRS cannot reopen a year after executing the Form 870-AD unless there  was, in the words of the email, “fraud, malfeasance, concealment, or misrepresentation of a material fact; an important mistake in a mathematical calculation; a deficiency or overassessment resulting from adjustments made under Subchapters C and D of Chapter 63 concerning the tax treatment of partnership and subchapter S items determined at the partnership and corporate level; or an excessive tentative allowance of a carryback provided by law.”  None of those items existed in this case.

Rather the IRS wanted to issue an IDR to obtain information not directly related to the claim.  Obviously if IRS found a “missed” upward adjustment in tax liability for the year in question, it would use that to reduce the amount of refund to be paid.

The email concludes the IRS has the authority to issue the IDR, as it is not re-auditing the return in question for assessing tax, but rather is examining the now separately filed claim for refund to determine the proper amount of that claim.   If, in fact, after all adjustments the IRS finds the tax was not overpaid for that year, then the refund claim would properly be denied.

The email cites the Supreme Court’s opinion the case of Lewis v. Reynolds, 284 US 281 (1932), holding:

In Lewis v. Reynolds, 284 U.S. 281 (1932), the Supreme Court upheld the Commissioner’s denial of a claim for refund when, upon re-examination of a previously audited return, the Commissioner determined a previously allowed deduction for attorney’s fees was improper and there was an additional tax due greater than the tax paid. The Court concluded that the Commissioner’s actions were proper, and that “the ultimate question presented for decision, upon a claim for refund, is whether the taxpayer has overpaid his tax. This involves a redetermination of the entire tax liability.” See Lewis v. Reynolds, 284 U.S. at 283. “While the statutes authorizing refunds do not specifically empower the Commissioner to reaudit a return whenever repayment is claimed, authority therefor is necessarily implied.” Id.

Advisers often read too much into the concept of “closed” years, and this ruling further reminds us that when the taxpayer files a claim for refund, the IRS has the right to determine whether an overpayment exists, effectively “reopening” all issues on the return in question.  While the IRS cannot assess additional tax, they can use that additional information to keep from having to issue the taxpayer a check.

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