Clients ask us all of the time, “What is the Joint Committee on Taxation’s (JCT) process for reviewing refund claims granted by the Internal Revenue Service (IRS)?” Recently, the JCT has released an overview of its process. Wait, what? After the IRS has agreed to issue you a refund, there is a congressional committee that has to check the IRS’s work? Yep!
Internal Revenue Code (IRC) §6405 prohibits the IRS/US Department of the Treasury from issuing certain refund payments to taxpayers until 30 days after a “report” is given to the JCT. Only refunds “in excess” of $5 million for corporate taxpayers and $2 million for all other taxpayers (partnerships, individuals, trusts, etc.) are required to be reported to the JCT. A refund claim is an amount listed on an amended return (e.g., Forms 1140X and 1120X), tentative carrybacks (e.g., Forms 1139 and 1045), and refunds attributable to certain disaster losses. Numerous types of refund payments are excepted from JCT review, including refunds claimed on originally filed returns, resulting from litigation and employment taxes. It is important to note that this process is not limited to the IRS Examination stage; it can also occur at the IRS Appeals stage or even in tax court litigation.
Procedurally, when the IRS proposes to a pay a taxpayer a refund amount within the dollar thresholds, a special team within the IRS’s Large Business & International Division reviews the matter and, if it agrees, prepares a report for the JCT substantiating the refund payment. The key part of the report is the technical explanation for the refund. In some cases, on behalf of our client, we have assisted in the preparation of reports in complicated situations to help expedite the review process.
The JCT will review the IRS report and accompanying documentation (calculation, copies of transaction documents, etc.) and work informally with the IRS to resolve any questions that the JCT may have prior to making its determination. In our experience, one of the key roles that the JCT plays in the process is to review the technical merits upon which the refund claim is based. If the JCT does not agree with the refund claim, it will issue a staff review memorandum explaining the reason for its disagreement and recommending a different outcome. Otherwise, the JCT will issue a clearance letter indicating that it does not disagree with the refund claim. Despite the 30 days listed in IRC §6405, in practice the IRS will not issue the refund payment until the JCT finishes its review and issues its recommendation.
If the JCT disagrees with the refund claim, the IRS is not bound by that decision, but the refund claim will be subject to additional scrutiny within the IRS. This requires consultation with IRS Area Counsel and elevation up the chain of command. If agreement cannot be reached as the matter progresses up the chain, it may ultimately need to be decided by the Director, Pre-Filing and Technical Guidance, with concurrence of the Chief Counsel.
In our experience, it is rare for the IRS to issue a refund payment where the JCT has disagreed with it. If that happens, the taxpayer and the IRS go back to the drawing board to try to figure out a resolution that will pass muster with the JCT or, if it is clear such a result is not possible, prepare for litigation.
Practice Point: In complicated refund claims, getting through the JCT review process can be difficult. We have found that working with the IRS team to develop the report that goes to the JCT helps to expedite the review process. This is especially the case with a resource strapped IRS. Anecdotally, in recent years the JCT has been increasingly disagreeing with refund claims, sending them back for further consideration by the IRS. In our experience, it is not uncommon for the JCT review process to take four to six months.
Oftentimes, the taxpayer may be unaware that the JCT is corresponding with the IRS regarding the matter. The government’s position is that any correspondence between the JCT and the IRS should be treated as agency records not subject to disclosure under the Freedom of Information Act. With this in mind, taxpayers should remain in close contact with the IRS during the JCT review process and seek to be involved if the JCT appears to have any disagreements with the refund claim.