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This section describes the statutory provisions requiring review of certain cases by the Joint Committee on Taxation (JCT); identifies those cases requiring review; and provides assistance in determining the jurisdictional amount.
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IRC section 6405(a) provides that " No refund or credit of any income, war profits, excess profits, estate, or gift tax, or any tax imposed with respect to public charities, private foundations, operators’ trust funds, pension plans, or real estate investment trusts under chapter 41, 42, 43, or 44, in excess of $2,000,000 shall be made until after expiration of 30 days from the date upon which a report giving the name of the person to whom the refund or credit is to be made, the amount of such refund or credit, and the summary of the facts and the decision of the Secretary, is submitted to the Joint Committee on Taxation."
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The Joint Committee review of a refund or credit made under IRC section 6411, which relates to carryback adjustments, is provided for in IRC section 6405(b). Tentative allowances will be refunded prior to reporting. After the correct amount of tax is determined by examination or survey action, the refund will be reported.
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If such determination results in a deficiency, but a net refund or credit exceeding $2,000,000 remains (i.e., partial recoupment of the tentative allowance), the net refund will be reported.
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IRC section 6405(c) provides that refunds in excess of $2,000,000, attributable to a taxpayer’s election under IRC section 165(i), will be made before submitting a report for review. This section allows a taxpayer to deduct a disaster loss in the taxable year immediately preceding the taxable year in which the disaster occurred. The report shall be prepared when the correct amount of tax is determined.
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Generally, a refund on the return as filed does not qualify as a refund or credit under IRC section 6405(a). There are exceptions, but only if the refund directly attributable to one of the following credits is in excess of $2,000,000:
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A report is required when a refund exceeding $2,000,000, which is attributable to a credit allowed under IRC section 835(d), is to be made to a mutual insurance company that is a reciprocal underwriter. This applies even though the credit is shown as a prepayment credit on the tax return. See Rev. Rul. 69-196, 1969-1 C.B. 303.
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Refunds under claim of right (IRC section 1341) are reportable but only if the decrease in tax computed under IRC section 1341 (a)(5)(B) is greater than the tax computed under IRC section 1341 (a)(5)(A) by more than $2,000,000. See Rev. Rul. 67-358, 1967-2 C.B. 412.
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The review by the JCT is limited to certain types of taxes. Excluded from review are certain excise taxes, employment taxes, trust fund recovery penalty cases, and windfall profit taxes. The following cases are not reportable either because they do not fall within the definition of "refund " or because their processing lacks the potential for the type of abuse or favoritism the statute was enacted to prevent:
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A refund or credit of estimated or withheld income tax, made without first examining the return.
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A refund or credit of an unassessed advance payment or deposit made before determining a taxpayer’s tax liability, or a refund or credit of an amount paid on a tentative return in excess of the amount of the tax liability reported by the taxpayer on a final return. A final return is defined as the last return filed by the due date for that return.
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Prior reports submitted to the JCT are not considered in determining whether the case meets Joint Committee criteria. In addition, if a case, which was previously closed, did not exceed $2,000,000, such amount should not be combined with any subsequently determined refund or credit in computing Joint Committee jurisdiction.
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A case of any type involving overassessments (as distinguished from overpayments) in excess of $2,000,000. For example, an abatement of an unpaid portion of an assessment under IRC section 6404 regardless of the amount is not a "refund or credit" under IRC section 6405.
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An overpayment determined by the United States Tax Court or any other court of competent jurisdiction as a result of the trial of a case (rather than by a stipulation of settlement).
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The examiner is responsible for determining whether a case is reportable to the JCT. The following guidelines and examples are designed to assist in making that determination. Where questions as to jurisdictional amount persist, the examiner should consult with the appropriate Joint Committee Specialist group or Area Counsel.
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The amounts proposed for allowance to each separate taxpayer provide the basis for determining whether the case requires a report. Overpayments proposed in other related cases do not enter into the computation. A deficiency against one taxpayer is not offset against an overpayment of another taxpayer, even though the changes resulted from the allocation of income or deductions from one taxpayer to the other, e.g. between a corporation and its foreign sales corporation (FSC).
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All open source years, whether previously examined or surveyed, need to be considered in determining the jurisdictional amount. For example, if tentative refunds added together exceed $2 million, both source years and any related tentative refund years, will be reported. This is true if one, none, or both of the separate tentative refunds exceed $2 million.
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IRC section 6405(a) and IRC section 6405(b) refunds or credits, which do not exceed $2,000,000, are not aggregated in determining jurisdictional amount.
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The preceding paragraphs are illustrated by the following examples:
Example 1 Facts:
Examination of 1998 return
Tentative allowances (IRC section 6411):1998 NOL carryback to -1996
1998 GBC carryback to -1997$ 1,500,000
550,000Jurisdictional Amount - IRC section 6405(b) $ 2,050,000 Conclusion:
Both refunds must be reported. The 1996, 1997, and 1998 returns must be surveyed or examined.Example 2 Facts:
Examination of 2000 return
Tentative allowances (IRC section 6411):- 2000 NOL carryback to 1998
- 2000 NOL carryback to 1999$1,250,333
1,625,000Previous tentative allowance: 1998 Capital Loss carryback to -1995 140,000 Conclusion:
If the statute of limitations has not expired and the tax year(s) have not been previously closed by examination approving the loss and tentative allowance, the 1998 capital loss and carryback to 1995 must be included in the report to the Joint Committee on Taxation along with the 2000 net operating loss and carryback to 1998 and 1999. (Note: RRA 98 changed the net operating loss carryback period from three years to two years effective in years beginning after 8/5/97, and changed the carryback of general business credit from three years to one year for tax years beginning after 12/31/97.)Example 3 Facts:
Examination of 2001 return
Tentative allowance (IRC section 6411):- 2001 NOL carryback to 1996 $2,250,000 Audit results: 1996 6405(a) refund 450,000 Conclusion:
A report is required for 1996 and 2001 for the IRC section 6405(b) refund of $2,250,000. The IRC section 6405(a) refund should be mentioned in the Joint Committee report. In addition, because the IRC section 6405(a) refund of $450,000 is not reportable, it can be processed prior to the submission of the report. (Note:The Job Creation and Worker Assistance Act of 2002 changed the carryback period to 5 years for NOLs from years ending in 2001 and 2002. Also, for Alternative Tax NOLs arising or being used in these years, there is no 90% limit for carryovers and carrybacks.)
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When determining whether a case is subject to JCT review, the overpayments of penalties and previously assessed and paid interest are added to the tax refund(s) in determining whether an overpayment exceeds $2,000,000. For example, if a case involves an overpayment of tax of $1,950,000 and an overpayment of previously assessed and paid interest of $60,000, it must be reported.
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The interest must be the same interest that was assessed. For example, the taxpayer files a claim for part of a previous examination assessment; the interest that was assessed on the tax is included in the jurisdictional amount.
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A refund of previously assessed interest in excess of $2,000,000 with no reduction in tax requires a report.
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A deficiency in one taxable year is offset against an overpayment for another taxable year for the same type of tax only where it involves the same taxpayer and the same examination.
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Accordingly, if a determined overpayment of one type of tax results in a deficiency of another type of tax for the same taxpayer and year, the deficiency should not be applied as an offset in determining the jurisdictional amount.
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In multiple-year examinations where there is a net deficiency (i.e., the total deficiencies exceed the total of all IRC section 6405 refunds), no report is required.
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In net overassessment cases that include deficiency years, a special computation is made to determine which, if any, of the refund years are to be reported. The procedure for determining the jurisdictional amount in a multiple-year examination involving deficiencies consists of four steps to be applied separately for each refund type (refunds under IRC section 6405(a), (b), and (c)). If there is an aggregate overpayment in excess of $2,000,000 for any of the refund types, only those aggregate refund years within the refund type(s), in addition to any applicable source years, need be reported to the JCT. These four steps are:
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Offset deficiency for a given year against refunds for that year;
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Determine the aggregate net deficiency for all net deficiency years;
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Determine the aggregate net overpayment by refund type for all net refund years; and
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Apply the aggregate net deficiency against the smallest of the aggregate IRC section 6405 refund types (even if the smallest aggregate amount is below Joint Committee review threshold). If the balance of that refund type after the application of the deficiencies is not in excess of $2,000,000, then that refund type is not reportable.
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If the offsetting described in paragraph (1) does not cause the refund type to be taken out of Joint Committee jurisdiction, then the aggregate amount of that refund type must be reported, and no further computation is required. If, after offsetting against the smallest refund type, some deficiency remains, then the same procedure should be followed for the next smallest aggregate refund type. In the rare event that two or more of the refund types are equal, then the net deficiency should be applied first to the aggregate refund type associated with the earliest year(s).
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Only those taxes prescribed by IRC section 6405 are included in the netting procedures and only the same types of tax may be used to offset each other. For example, a deficiency from a gift tax examination should not be netted against an income tax overpayment to reduce the refund below the jurisdictional amount. Similarly, taxes not subject to Joint Committee jurisdiction may not be included in the netting procedures. For example, a deficiency in employment taxes cannot be netted against an income tax overpayment to reduce the refund amount below the Joint Committee jurisdictional amount.
Example 1: Year Deficiency IRC section 6405(a) Refund IRC section 6405(b) Refund 1991 10,000 (1,205,000) 1992 225,000 1993 (570,000) 1994 180,000 1995 (240,000) 1996 (1,460,000) 1997 (800,000) 1998 (410,000) Totals 415,000 (2,670,000) (2,015,000) Same year offset (10,000) 10,000 Net deficiency/refund 405,000 (2,670,000) (2,005,000) Smaller amount offset (405,000) 405,000 Jurisdictional amount 0 (2,670,000) (1,600,000) Since the net aggregate IRC section 6405(b) refund is not in excess of $2,000,000 after the application of the net deficiency, none of the IRC section 6405(b) years are jurisdictional years which are reportable. However, since the aggregate IRC section 6405(a) refund is in excess of $2,000,000, the 1996, 1997, and 1998 refunds are reportable.
Example 2: Year Deficiency IRC section 6405(a) Refund IRC section 6405(b) Refund 1993 1,005,000 (2,005,000) 1994 (2,005,000) 1995 600,000 Net deficiency/refund 1,605,000 (2,005,000) (2,005,000) Same year offset (1,005,000) 1,005,000 Subtotal 600,000 (2,005,000) 1,000,000 Remaining amount offset (600,000) 600,000 Jurisdictional amount 0 (2,005,000) 400,000 A report is required on the IRC section 6405(a) refund. The IRC section 6405(b) refund is not reportable since the amount after offset does not meet the jurisdictional minimum. Example 3: Year Deficiency IRC section 6405(a) Refund IRC section 6405(b) Refund 1993 900,000 (1,005,000) 1994 (2,670,000) 1995 1,005,000 Net deficiency/refund 1,905,000 (2,670,000) (1,005,000) Same year offset (900,000) 900,000 Subtotal 1,005,000 (2,670,000) (105,000) Smaller amount offset (105,000) 105,000 Subtotal 900,000 (2,670,000) 0 Remaining amount offset (900,000) 900,000 Jurisdictional amount 0 (1,770,000) 0 A report is not required. After the offsetting, none of the refund types meet the jurisdictional amount. Example 4: Year Deficiency IRC section 6405(a) Refund IRC section 6405(b) Refund 1995 2,340,000 (2,230,000) 1996 (2,220,000) (160,000) Totals 2,340,000 (2,220,000) (2,390,000) Same year offset 2,230,000) 2,230,000 Net deficiency/refund 110,000 (2,220,000) (160,000) Smaller amount offset (110,000) 110,000 Jurisdictional amount 0 (2,220,000) (50,000) Only the IRC section 6405(a) refund for 1996 is reportable, however, the tentative refund and deficiency for 19954 should be noted in the Joint Committee report. Example 5: Year Deficiency IRC section 6405(a) Refund IRC section 6405(b) Refund 1995 890,000 (3,050,000) 1996 (210,000) Totals 890,000 (210,000) (3,050,000) Same year offset (890,000) (890,000) Jurisdictional amount 0 (210,000) (2,160,000) Only 1995 is reportable, however, the refund for 1996 should be noted in the Joint Committee report.