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If the resolution of a tax refund claim is contingent on future events and may not be determinable until after the time period for filing a claim for refund expires, practitioners can file a protective claim for refund on behalf of the taxpayer. A protective claim can be either a formal claim or an amended return for credit or refund.

Protective claims are often based on current litigation or expected changes in the tax law, other legislation, or regulations. A protective claim preserves the taxpayer’s right to claim a refund once the contingency is resolved. A protective claim does not have to state a particular dollar amount or demand an immediate refund. However, to be valid, a protective claim must:

  • Be in writing and be signed,
  • Include the taxpayer’s name, address, Social Security or Taxpayer Identification Number,
  • Identify and describe the contingencies affecting the claim,
  • Clearly alert the IRS as to the essential nature of the claim, and
  • Identify the specific year(s) for which a refund is sought.

Generally, the IRS will delay action on the protective claim until the contingency is resolved, and may obtain additional information necessary to process the claim and either allow or disallow the claim.

Typically, protective claims are filed when the refund statute is due to expire and the taxpayer is unable to file a refund claim.

There are a couple of circumstances in which a protective claim should be considered, such as a situation in which the taxpayer is unable to submit supporting information that establishes its actual right to a refund; the taxpayer is unable to quantify the claim precisely, that is, calculate exact amount of the claimed overpayment; there is pending litigation on the issue involved in the protective claim, the results of which may substantially affect whether the Service allows the claim; an expected change to the Code or the regulations may have a substantial impact on the decision whether to allow the claim, or the Service has proposed changes in a tax year under examination that would, if sustained, create an overpayment in another tax year.

One example of a protective claim is when a taxpayer believes it is entitled to a refund but has not been able to ascertain all of the relevant supporting documents before the statute expires. One such situation would be for the filing of a refund claim based upon a section 41 research claim in which the taxpayer has not gathered all the relevant documents and has not quantified the actual credit amount. In that situation, the protective claim is intended to preserve the taxpayer’s right to a refund. But in this situation taxpayers should be caution about using protective claims.

General Counsel Memorandum (GCM) 38786 describes various circumstances in which filing a protective claim would be appropriate when the refund statute is due to expire. Those circumstances include (1) pending litigation that may substantially affect the IRS’s decision whether to allow the claim and (2) an expected change in the Code or the regulations that may have a substantial effect on the IRS’s decision whether to allow the claim.

GCM 38786 stated that if the taxpayer cannot submit the supporting statements with the refund claim, it “should be allowed a reasonable period of time in which to furnish the necessary evidence.” Also, “[i]f the information is not furnished within a reasonable period of time and if the Service does not obtain such information on its own, the claim may be disallowed.” Nevertheless, there have been instances in which the Service has formally disallowed protective refund claims when the taxpayer specifically described the grounds on which it believed it was entitled to a refund (for example, entitled to a larger section 41 research credit), but is unable to quantify precisely the overpayment amount because of an incomplete research credit study.

In a Service Center Advice memorandum (SCA 199941039), the IRS tried to distinguish protective refund claims from what it referred to as “incomplete claims.” Although the memorandum does not discuss GCM 38786, there is some support for the incomplete-claim concept which can be found in Treasury Regulations section 301.6402-3(a)(5), which provides “[a] return or amended return shall constitute a claim for refund or credit if it contains a statement setting forth the amount determined as an overpayment.”

If the IRS attempts to disallow a protective claim, practitioners should consider requesting additional time to provide supporting documentation. However, even when a claim is disallowed under such circumstances, GCM 38786 notes that the taxpayer “should be allowed to reopen the claim if it subsequently obtains the additional evidence needed to prove its right to a refund, provided that the Service has sufficient time to reconsider the claim prior to the expiration of the period of limitations prescribed in section 6532(a).” This section provides that a taxpayer may bring suit for refund within two years from the date of claim disallowance.

Once the taxpayer obtains sufficient information to perfect a protective claim for refund, the protective claim should be promptly perfected. Perfection is accomplished by filing a complete refund claim under the normal rules, with a cover letter explaining the circumstances and furnishing a copy of the filed protective claim and the date the protective claim was filed.

EDWARD M. ROBBINS, Jr. – For more information please contact Edward M. Robbins, Jr. –EdR@taxlitigator.com  Mr. Robbins is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., the former Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal)  and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at www.taxlitigator.com


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