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March 1, 2016

IRS Limits Ability to Submit Informal Refund Claims During Audits

IRS Audits

Houston Tax Attorney

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The IRS released Publication 5125, Large Business & International Examination Process, which describes the IRS audit process and the new change for taxpayers submitting informal refund claims during the audit.

The Publication continues the IRS’s prior policy of cooperation, responsiveness, and transparency in conducting audits. The Publication re-iterates the IRS’s expectations for its examiners and desired cooperation from taxpayers. This part of the Publication does not provide anything new.

The section dealing with refund claims is new. This section says that the IRS “will only accept informal claims that are provided to the exam team within 30 calendar days of the opening conference” and “After the 30-day window, claims for refund for issues not identified for examination must be filed using Form 1120X, Form 1040X or Form 843 as required by Treasury Regulations.”

This change will have the biggest impact on larger taxpayers. Larger taxpayers are generally under continuous audit by the IRS. These taxpayers have had the ability to present informal refund claims to the IRS exam team at any time during the course of the audit cycle. In most cases, the IRS exam team would only refuse to consider refund claims if they were submitted near the end of the IRS audit cycle. This allowed large taxpayers to wait and see what issues came up during the IRS audit before they decided to present refund claims. For example, if the IRS uncovered a significant adjustment, the taxpayer could present refund claims that it did not originally feel comfortable putting on its tax return (which is signed under penalties of perjury). Now, larger taxpayers will not have this advantage.

The downside for the IRS is that these refund claims that are filed with the IRS service center may not be audited. If they are not, the taxpayer may receive a refund before their IRS audit closes. This can present a number of procedural problems for the IRS team. For example, the IRS would have to factor the refund into any adjustment it makes on audit. Also, the IRS exam team may lose the ability to audit this refund claim–which could pose problems if the refund claim was related to or required correlative adjustments that impacted the issues that are under audit.

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