The Form 1045, Application for Tentative Refund, is used to carryback losses, credits, etc. from the current year to prior years. In many cases it is used when a taxpayer was previously profitable and then incurrs a loss. The now unprofitable business can go back and recoup taxes paid in prior years and get a check from the IRS in a very short timeframe.
We saw a lot of these in Houston after the recent downturn in the oil and gas market. Sounds simple enough. It isn’t. One recurring issue with the Form 1045 is that the time to actually recoup a refund can lapse if the IRS does not process the form timely. There are quite a few court cases that make it clear that the Form 1045 does not extend the time to file an actual refund claim and the failure to file an actual refund claim can result in the taxpayer not being able to recoup the refund.
This harsh result and the frequency in which it arises warrants taking some proactive steps to try to mitgate the losses. In the recent Silipingo v. United States, No. 1:15-CV-0017 (NDNY 2017), the court addressed one way taxpayers may do this.
The Facts in Silipingo
In 2010, the taxpayer filed his Form 1040 to report a $2,194,793 net operating loss. He included a Form 1045 to request a $806,586 refund due to the net operating loss carryback from the 2009 tax year. The IRS conducted and audit and, after a referral to the criminal investigation function resulted in no criminal charges, the IRS did not allow the 2005 refund.
The IRS’s position was that there were several other items on the 2005 return that were incorrect, but the time allowed by law for the IRS to audit and adjust those items had passed. Click here for more information on correcting late or unfilled tax returns or click here for more information on IRS audits. The IRS’s practice–which is well established law–is to disallow the refund for 2005 by presuming that the other items were corrected on the 2005 return and, as a result, the refund was not owed. The IRS did not get around to this until sometime in late 2014.
Those who work tax cases see the problem. The time for filing a refund claim for the net operating loss for 2009 started to run in 2010, when the 2009 return was filed. That period ended in late 2013. The taxpayer did not file a refund claim (a Form 1040X) within this time period. He only filed a Form 1045.
The taxpayer filed suit and argued that he had in fact filed what amounted to a refund claim, even though a Form 104X was not actually filed. The taxpayer argued that:
his Form 1045, coupled with additional written and oral submissions to the IRS, constitutes a timely informal claim…
This brings us to the informal claim doctrine.
The Informal Claim Doctrine
The informal claim doctrine is a judicial doctrine. It allows a taxpayer to retain his right to sue in federal court and to a refund even though an actual refund claim, such as a Form 1040X, was not filed. To qualify, the informal claim has to put the IRS on notice of the taxpayer’s right to a refund, it must describe the legal and factual basis for the refund, and it must have some written component. The Form 1045 alone does not satisfy these requirements. The question in the Silipingo was whether the Form 1045 plus additional information satisfied the informal claim doctrine. The court did not answer the question. Instead, it noted that there was no evidence presented in this case of additional information that could have been submitted to the IRS prior to the time the claim was time barred. So the taxpayer did not prevail.
The Takeway: Include a Detailed Cover Letter with the Form 1045
While the court did not rule on the issue in Silipingo given the facts, the case suggests that the Form 1045 should always be sent with a cover letter that will satisfy the requirements of being a formal claim. The cover letter should say that it is a refund claim and it should spell out the legal and factual basis for the claim. This may help protect the taxpayer’s right to a refund in the event that the IRS is dilatory in processing the refund. As long as the IRS does not process the Form 1045 as a refund claim but still processes it as a Form 1045, the taxpayer may be able to get a quick refund and still preseve their right to file a refund if that was necessary in the future.