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Part 4. Examining Process

Chapter 90. Federal, State and Local Governments (FSLG)

Section 7. Claims

4.90.7  Claims

4.90.7.1  (06-30-2007)
Overview

  1. This section provides detailed procedures on how to examine or survey claims. Claims processed by Federal State and Local Governments (FSLG) will generally be associated with employment tax issues.

  2. A customer can file a claim for refund or a claim for the abatement of tax. This may be done with an amended return, Form 843, Claim For Refund and Request For Abatement, or a letter from the customer. The procedures to follow when processing a claim or amended return depend on several factors.

  3. Claims for refunds can be either formal or informal.

    1. A formal claim is a request by the customer for refund or credit of income, employment, gift, or estate tax that has been made following the statutory requirements of IRC Regulation 301.6402. In general, a formal claim is one that is made using Form 843 (or Form 1040X, 1120X, etc. if it involves income taxes); the claim must set forth in detail the grounds upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis, including the appropriate tax periods.

    2. An informal claim is a request that does not meet all of the statutory requirements, but where formal defects are remedied by amendment. Several court cases discuss this concept including United States v. Kales, 314 U.S. 186 (1941); Newton v. United States , 163 F. Supp. 614 (Ct. Cl. 1958).

    Whenever a claim provides the necessary information, whether formal or informal, it is handled as a valid claim for refund.

  4. In accord with Policy Statement P-4-103, in cases in which employment taxes were assessed based upon an examination, the taxpayer will generally be required to pay the assessment and file a claim for refund before receiving any further consideration on the case. However, some cases may warrant prior consideration.

  5. Generally, the Service Center will forward amended returns, Form 843 and other claims for refund to the field office if there is an open Audit Inventory Management System (AIMS) database. If the FSLG Specialist receives an amended return, Form 843, or other claim for refund on an open examination showing a decrease in tax liability, he or she should request a current IDRS transcript to determine whether the claim has been paid. If it has, it is no longer a claim. If it has not been processed, consider the issues presented and follow the claim procedures. The source code will generally not be updated to 30, unless the scope of the examination will be primarily related to the claim issues. If revenue base protection applies (money is prevented from leaving the Treasury), then complete Form 5599, items 22, 23 and 24 (see IRM Exhibit 4.90.12-1).

  6. Claims are high-priority cases. If the Service does not act on a claim within six months from the filing date of the claim, the customer is entitled to file suit. Examination action on claims must be started within thirty (30) days of receipt in the group.

  7. The first step in considering a claim is to review the original return and a current IDRS transcript for any subsequent adjustments to insure the claim has not been paid. The issues raised in the claim should be considered to determine whether there is a basis for a change to the tax liability. If the statute of limitation on assessment on the original return is open, an examination can include any other large, unusual, or questionable items that warrant examination and is not limited to the issues raised in the claim.

4.90.7.2  (06-30-2007)
Statute of Limitations (§ 6511)

  1. The Specialist must always check claims to verify that they were timely filed. Generally, a claim must be filed by the customer within three years from the time the original return was filed, or two years from the time the tax was paid (or applied from another return), whichever period expires later. See IRM 25.6.6.

    1. If a claim for refund is filed within three years from the time the return was filed, only the tax paid within the three years preceding the filing of the claim, plus the period of any extension of time for filing the return, can be refunded. (IRC 6511(b)(2)(A))

    2. If a claim is not filed within the three year period, then only the tax paid within the two years preceding the filing of the claim can be refunded. (IRC 6511(b)(2)(B))

    3. If no claim is filed, then only the tax paid that would have been allowable, under (a) or (b) above, if the claim was filed on the date the credit or refund was allowed can be refunded. (IRC 6511(b)(2)(C))

    The fact that a claim has been filed never extends the statute for assessing an additional deficiency. Taxable amended returns have the same statute of limitations as the original returns.

  2. When a customer files a claim timely, the statute remains open for the IRS to examine it. If the IRS takes no action on the claim within six months from the time it was filed, the customer can file suit in court to recover the amount claimed. The period for filing suit lasts until two years after the date a certified notice of claim disallowance is mailed to the taxpayer or the date the taxpayer signed Form 2297, Waiver of Statutory Notification of Claim Disallowance. On the other hand, if the Service allows the claim (this could be done by the Service Center prior to the case being sent to the field for examination), any further action on that year's return creates a barred statute situation if that year is a closed year.

  3. An executed consent extends the time to file a claim. If a customer does not file for a claim within the time limits prescribed by IRC section 6511(a), the customer may still file a claim if the statute of limitation for assessment has been extended by agreement of the Service and the customer (IRC 6511(c)). This filing period will last until six months after the expiration of the extension period.

  4. If, after the execution of a consent and within six months after the expiration of the extension period, a claim is filed, or a credit or refund is allowed when no claim is filed, the amount of credit or refund is limited. This limit is the portion of the tax paid after the execution of the consent and before the filing of the claim (or making of the credit or refund), PLUS the portion of the tax paid within the period which would be applicable under IRC section 6511(b)(2) if a claim had been filed on the date the consent was executed.

4.90.7.3  (05-31-2006)
Procedures on Processing Claims

  1. This section discusses general procedures for processing claims for refunds and claims for abatement of employment taxes. Also see IRM 4.23.13.

4.90.7.3.1  (05-31-2006)
Establishment and Closure of Claims on Audit Inventory Management System (AIMS):

  1. FSLG customers generally file claims at the Ogden campus, which are forwarded to FSLG Compliance and Program Management office (CPM) for classification. The cases will be established on EOIC and AIMS by CPM in source code 30 (claims) and updated to the group assigned the claim. The claims will be closed through CPM Quality Review.

4.90.7.3.2  (05-31-2006)
Authority to Close Claims

  1. The FSLG Specialist has the authority to close the claim by disallowance (full or partial), or allowance in full. All cases are subject to review by the Field Manager and/or CPM Quality Review. Only the Field Manager may survey the claim before assignment and must approve any survey after assignment recommended by the Specialist.

4.90.7.3.3  (06-30-2007)
Claims for Refund

  1. The procedure for processing claims for refund depends upon whether the claim is surveyed or examined.

4.90.7.3.3.1  (06-30-2007)
Claim Amount

  1. If the correct claim amount is not shown on Form 5546, Examination Return Charge-Out, or on AMDISA, the Specialist must prepare a Form 5598, TE/GE Correction Request, to update AIMS with the correct amount.

4.90.7.3.3.2  (06-30-2007)
Survey Before or After Assignment

  1. The Specialist may survey a claim after assignment without conducting an examination. The claim can be allowed in full. A claim cannot be surveyed if the amount claimed by the customer includes interest and/or penalties; instead, the case is treated as a partial disallowance. If a claim is received for a tax year on which an examination has already been closed and there is an open AIMS database, the claim will usually be returned to the Specialist who conducted the examination. The Specialist should consider the issues on the claim, then incorporate any allowable adjustments into the examination report. In this situation, the claim should not be surveyed.

  2. In a survey before or after assignment of a claim, the return should be stamped - "surveyed" as described in IRM 4.23.10. In addition, Form 2503, Survey after Assignment-Excise or Employment Tax, should be used to explain the reason for surveying the return.

  3. Surveyed claims require a Disposal Code of 34 in Item 13 of Form 5599, TE/GE Examined Closing Record, and the claim amount must be entered in Item 21. In addition, the following items should be addressed: 12, 15, 32, 40, and 50. No entry should be made in items 22, 23, 24, 28 and 30. No entry is required in 31 and 33. See IRM 4.90.12 for complete instructions on preparing Form 5599.

    Note:

    The only claims that cannot be surveyed are those requiring Appeals consideration or Joint Committee cases.

4.90.7.3.3.3  (06-30-2007)
Examined Claims

  1. If claims are disallowed in whole or in part, Form 2297, Waiver of Statutory Notification of Claim Disallowance, and Form 3363, Acceptance of Proposed Disallowance of Claim for Refund or Credit, are solicited. See IRM 4.23.13.6. Instructions for completing these forms can be found in IRM 4.10.8.8.

  2. Use Form 5599 to close all examined claims. Items which apply to claims should be completed as necessary, including Items 12, 13, 15, 20–24, 31–33, 39, 40 and 50. If the scope of the examination was expanded beyond the claim issues, then all non-claim related examination items must be addressed on Form 5599 as appropriate. Examination time-related revenue base protection is entered on Item 23; whereas time devoted to development of non-revenue base protection is reported on Item 28. When using disposal code 03 for claim allowed in full or in part, at least one hour must be entered in Item 28. See IRM 4.90.12-1 and 4.5.2 for complete instructions on preparing Form 5599.

  3. Examined claims may use a variety of disposal codes, depending upon the situation. Refer to the following table:

    Claim Disposal code
    Allowed in full 03
    Partially allowed - agreed 03
    Partially allowed - unagreed Appropriate unagreed disposal code
    Disallowed in full 01

  4. Refer to IRM 4.23.10 for report writing procedures.

  5. In addition, depending on the outcome of the examination, claim cases will be processed as agreed or unagreed as described below:

4.90.7.3.3.3.1  (06-30-2007)
Claim Disallowed in Full without Additional Tax Due

  1. You can close the case agreed without Form 3363 provided that Form 2297 is signed and the case is not protested. Also, the case can be closed as agreed if the agreement is secured on Form 3363, even though the customer will not execute Form 2297. The Specialist should indicate on Form 3198-A that Letter 987, Notification Letter - Agreed Income Tax Change Cases, is to be issued. Letter 987 will be prepared and issued by CPM.

  2. Use Letter 569, Preliminary Claim Disallowance, for unagreed cases. If there is no reply from the customer after thirty days, Form 3198-A should state: "Issue Letter 906 – Notice of Claim Disallowance – Full" . CPM will prepare and issue Letter 906, Certified Claim Disallowance Letter.

4.90.7.3.3.3.2  (05-31-2006)
Claim Disallowed in Full with Additional Tax Due

  1. For an agreed case, secure the customer’s signature on both Form 3363 and Form 2504, Agreement of Assessment and Collection of Additional Tax and Overassessment. The Specialist should indicate on the Form 3198-A that Letter 987 is to be issued. Letter 987 will be prepared and issued by CPM.

  2. Use Letter 569 for all unagreed cases. If there is no reply from the customer after thirty days, the Form 3198 should state: "Issue Letter 906 – Notice of Claim Disallowance – Full" . Letter 906 will be prepared and issued by CPM.

4.90.7.3.3.3.3  (05-31-2006)
Claim Partially Disallowed without Additional Tax Due

  1. The case can be closed agreed without Form 3363 as long as Form 2297 is signed and the case is not protested. Also, the case can be closed as agreed if the agreement is secured on Form 3363 and Form 2504, even though the customer will not execute Form 2297. The Specialist should indicate on the Form 3198-A that Letter 987 is to be issued. CPM will prepare and issue Letter 987.

  2. Letter 569 is used for unagreed cases. If there is no reply from the customer after thirty days, the Form 3198-A should state: " Issue Letter 905 – Notice of Claim Disallowance – Partial" . Letter 905, Letter Notifying Taxpayer of Partial Refund Claim Disallowance, will be prepared and issued by CPM.

4.90.7.3.3.3.4  (05-31-2006)
Claim Partially Disallowed with Additional Tax Due

  1. For an agreed case, the customer should sign Form 2297 and agree to the additional deficiency by signing Form 2504. The Specialist should indicate on Form 3198-A that Letter 987 is to be issued. CPM will prepare and issue Letter 987.

  2. Letter 569 is used for unagreed cases. If there is no reply from the customer after thirty days, Form 3198-A should state: "Issue Letter 905" . CPM will issue and prepare Letter 905.

4.90.7.3.3.3.5  (05-31-2006)
Claim Allowed in Full with Offsetting Adjustments

  1. In this situation, the claim will be treated as a partially or wholly disallowed claim. Follow the procedures listed above as applicable.

4.90.7.3.3.3.6  (05-31-2006)
Claim Allowed in Full

  1. Forms 2297 and 3363 are not needed in this situation. It is also not necessary to get the customer’s signature on Form 2504. However, a copy of the report should stay with the file to assist the Closing Unit in processing the overassessment.

  2. The Specialist should prepare an undated Letter 570, Examination Report (Claim Allowed In Full). Once this is done, the case can be closed immediately. The Closing Unit will issue Letter 570; once the customer receives the letter, it constitutes a closed case.

4.90.7.3.3.3.7  (05-31-2006)
Claim Allowed in Full with an Additional Refund

  1. Forms 2297 and 3363 are not needed in this situation. The customer’s signature should be solicited on Form 2504. If, after thirty days, there is no response from the customer, the case is treated as a defaulted claim and is closed agreed. Form 3198-A should state: "Agreed Claim Plus Additional Refund – Issue Letter 915" . If the Form 2504 was not signed by the customer, Form 3198-A should also identify the case as a defaulted claim.

4.90.7.3.4  (05-31-2006)
Claim for Abatement of Employment Tax

  1. Refer to 4.23.13.2.

  2. Use Letter 924, No Consideration Letter on Abatement Claim, for all claims for abatement of employment taxes. Never use Letter 569, Form 3363, Form 2297, or any other letter that explains appeal rights. The customer has no appeal rights beyond the group level without paying the tax and filing a formal claim. This should be explained to the customer with the following paragraph: "The Internal Revenue Code has no provision for filing tax abatement claims. If you do not agree with our determination, you may, after paying the additional tax due, file an amended return or claim for refund. If you file a claim or amended return, you should do so within three years from the date your return was filed or, if later, two years from the time the tax was paid."

4.90.7.4  (05-31-2006)
Barred Refunds

  1. The filing of an original tax return reflecting an overpayment constitutes a claim for credit or refund. The customer that files an original tax return reflecting an overpayment is considered to have filed a claim within three years of filing a return. A refund is allowed if payment was made within three years of the date that the original return or claim for refund is considered filed, as long as no petition is filed with the Tax Court.

  2. If no return had been filed as of the date of mailing of the notice of deficiency, and the notice of deficiency was mailed more than 3 years after the due date of the return (with extensions), the taxpayer is only entitled to recover amounts paid within two years prior to the mailing of the notice of deficiency.

  3. IRC section 6513(b)(1) provides that for purposes of IRC section 6511 any tax withheld with respect to a wage earner shall be deemed to have been paid on the fifteenth day of the fourth month following the close of the wage earner's taxable year (individual returns only). Similarly, IRC section 6513(b)(2) provides that any estimated tax payments made during any calendar year are deemed paid on the last day prescribed for filing the return for that year without regard to any extensions. Therefore, if a customer files a tax return more than three years after the due date for the return (including valid extensions), any overpayment due on the tax return as a result of income tax withheld or estimated tax payments is forfeited and will not be refunded to the customer.

  4. Furthermore, barred refund amounts cannot be carried forward or back to offset delinquent accounts or future tax liabilities of the customer. The refunds are posted to an excess collections account using Form 8758, Excess Collection File Additions.

  5. Issue a preliminary claim disallowance letter, Letter 569, when a delinquent return seeks a claim for refund for withheld / estimated taxes, earned income credits or payments that are barred by the period of limitations under IRC Section 6511. If an Appeals conference is not requested, Letter 906 will be issued). Annotate Form 3198-A, "Issue L-906, Certified Notice of Claim Disallowance - Transfer barred refund to an excess collections account " . CPM will prepare and issue Letter 906.

4.90.7.5  (05-31-2006)
Other Claim Procedures

  1. There are additional procedures that Specialists must follow related to reconsideration of a claim and withdrawal of a claim.

4.90.7.5.1  (05-31-2006)
Requests for Reconsideration of Disallowed Claims

  1. Requests for reconsideration will not be treated as original claims. There is no provision in the Internal Revenue laws or regulations authorizing or requiring the issuance of a certified notice of the denial or disallowance of a customer's request for reconsideration of a claim for refund previously disallowed by certified notice. The Specialist’s report must not state or imply that a certified notice of disallowance will be issued. See IRM 4.23.13.8.

4.90.7.5.2  (05-31-2006)
Request For Withdrawal of a Claim

  1. If a customer files a request for withdrawal of a claim, the only action required is to issue a certified notice of claim disallowance.

  2. If the customer advises that the claim was filed for the sole purpose of instituting suit and that he or she does not wish to exercise appellate rights, the Specialist should state this in the "Other Information " section of the examination report.

4.90.7.6  (05-31-2006)
Case File Assembly

  1. Case files for examined claims will be assembled in the same manner as case files for other examinations. See also 4.90.12.


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