In Chief Counsel Advice 201719026 the IRS looked at what happens to taxpayers who, under terms of the Offshore Voluntary Disclosure Program (OVDP), find that there is a refund due on one of the prior year returns filed under the program. The key question was whether any such refund could be offset against other taxes due or refunded to the taxpayer.

The OVDP program was created in 2009 to allow a method for taxpayers with previously undisclosed foreign bank accounts to come into compliance voluntarily. Under the terms of the program a taxpayer must disclose all such offshore accounts and file original or amended returns reporting the income for the most recent eight years of returns whose due date has passed. The taxpayer also gives consent for the IRS to assess tax for all those years as part of the program regardless of whether the period for assessment generally under IRC §6501 has run.

Normally this results in tax being due on those returns, but in some cases one or more of those original or revised returns may lead to a refund of tax. Not surprisingly, the taxpayers request that the overpayments be netted against the tax due in other years. Those IRS employees dealing with this issue sought advice from the Chief Counsel’s office to determine if such a request could be granted and, if so, under what conditions.

The CCA concludes that such an offset or refund will not be possible merely due to the taxpayer signing a consent to open the statute for assessing tax under IRC §6501. Rather, the amended or original return must be filed within an otherwise statutorily allowed time frame for a claim for refund for the overpayment to be available for the taxpayer.

As the advice describes a normal situation that leads to the request for advice:

A typical fact pattern might involve a taxpayer for whom the disclosure period is tax years 2003 through 2010. For tax years 2003 through 2007 and 2009 and 2010, the taxpayer reports additional income and tax. But the amended return submitted for tax year 2008 includes a large loss, resulting in an overpayment for that tax year. After reviewing the amended return, the examining agent confirms the claimed loss and the resulting tax computations show an overpayment for tax year 2008. The taxpayer then requests that the overpayment for tax year 2008 be credited against increases in tax for the other tax years in the disclosure period or the miscellaneous offshore penalty. You have asked for advice regarding how I.R.C. §§ 6511 and 6514 affect the Service’s ability to credit the overpayment as requested by the taxpayer.

The memorandum outline the basic rules for the time periods for a taxpayer to file a claim for refund as follows:

I.R.C. § 6514(a)(1) prohibits the Service from crediting or refunding any overpayment unless the taxpayer timely filed a claim for refund or credit of such amount. I.R.C. § 6511(a) requires that a claim for refund or credit be filed within three years from the time the original return was filed or two years from the time the tax was paid, whichever is later. In addition, the amount of any refund or credit is limited by I.R.C. § 6511(b), which provides either: (1) a three year look-back period in cases in which the claim was filed within three years of the return or (2) a two year look-back period in cases in which the claim was filed within two years of payment.

I.R.C. § 6511(c) provides a special rule for situations where a taxpayer has executed a consent to extend the statute of limitations on assessment pursuant to I.R.C. § 6501(c)(4). I.R.C. § 6511(c)(1) provides that, when a taxpayer enters into an agreement to extend the period of limitations on assessment during the three-year refund or credit period prescribed in I.R.C. § 6511(a), the period for filing a timely claim for refund or credit shall not expire prior to six months after the expiration of the assessment period as extended by that agreement. Where a claim for refund or credit is filed within the period prescribed by I.R.C. § 6511(c)(1), I.R.C. § 6511(c)(2) limits the amount of the refund or credit to the portion of the tax paid after the execution of statute extension plus the portion of the tax paid within the look-back period which would be applicable under I.R.C. § 6511(b)(2) if the claim for refund or credit had been filed on the date that the statute extension was executed.

The memorandum then goes on to describe how to apply these rules to a taxpayer who has entered the OVDP program:

Whether a taxpayer with the facts described above is entitled to have his or her 2008 overpayment credited against increases in tax for other tax years in the disclosure period or against the miscellaneous offshore penalty will depend on whether the 2008 amended return (which serves as the claim for refund or credit) was filed within the period prescribed by I.R.C. § 6511. If, for example, the taxpayer entered the OVDP in March, 2012, there is a good chance that the taxpayer’s 2008 amended return was filed within the three-year period described in I.R.C. § 6511(a). If, on the other hand, the taxpayer entered the OVDP in March, 2014, it is less likely that the amended return was filed within the three-year period described in I.R.C. § 6511(a). It is certainly possible that the amended return was filed within that three-year period, particularly if the original 2008 return was filed late, although there may not be any payments in the 3-year look back period prescribed by I.R.C. § 6511(b)(2)(A). It is also possible that the taxpayer made payments with respect to the 2008 tax year after the 2008 return was filed. If the amended return was filed within two years of any payment, it would also be timely filed. However, I.R.C. § 6511(b)(2)(B) would limit the amount of the refund or credit to amounts paid within the two-year period preceding the filing of the claim.

A claim for refund or credit for 2008 might also be timely by virtue of I.R.C. § 6511(c)(1). OVDP FAQ 25 requires taxpayers who are participating in OVDP to submit properly executed statute extensions for each of the eight tax years included in the disclosure period. If a taxpayer and the Service entered into an agreement under I.R.C. § 6501(c)(4) extending the taxpayer’s 2008 period of limitations on assessment during the three-year period described in I.R.C. § 6511(a), then the taxpayer’s claim for refund or credit would be timely as long as it was filed within six months of the expiration of the of the period within which assessment may be made pursuant to the agreement or any extension thereof. However, as with claims filed within the standard three-year or two-year periods described in I.R.C. § 6511(a), claims considered timely under I.R.C. § 6511(c)(1) are also subject to amount limitations. Therefore, even if the hypothetical taxpayer executed a statute extension within the period provided for by I.R.C. § 6511(a), I.R.C. § 6511(c)(2) would limit the amount of the 2008 overpayment available for credit to the portion of the tax paid after the execution of statute extension, plus the portion of the tax paid within the look-back period which would be applicable under I.R.C. § 6511(b)(2) if the claim for refund or credit had been filed on the date that the statute extension was executed. If the statute extension was executed within three years of the original return, the look-back period would be three years. If the statute was executed within two years of a payment, the look-back period would be two years.

The memorandum goes on to note that there are other specialized extensions of time to file a claim for refund under the law, such as the period to file a claim for refund arising from a net operating loss, that could also serve to allow recognition of the claim as available to offset taxes due.

The memorandum ends with the following summary:

Ultimately, whether a taxpayer is entitled to have any overpayment credited against a liability for another tax year or against the miscellaneous offshore penalty depends on whether that taxpayer filed a timely claim for refund or credit. If the claim was filed within the period prescribed by I.R.C. § 6511, the claim is timely and the taxpayer is entitled to a credit for the overpayment of amounts paid within the relevant look-back period. If the claim for refund was not filed within the period prescribed by I.R.C. § 6511, the overpayment is barred and I.R.C. § 6514 prohibits the Service from crediting it against liabilities for other tax types or periods.