A taxpayer can file a claim for refund only if the request is made in a timely fashion and the taxpayer provides the IRS with grounds for the claim and facts to inform the IRS of the basis for the claim. In the event the taxpayer does not have complete information or recovery of the claim depends on the occurrence of a future event, a protective claim for refund can be filed to toll the applicable limitations period for filing the claim.
Protective Claim for Refund
A protective claim is usually used by a taxpayer when they are aware of facts and circumstances likely to cause an overpayment, but there is uncertainty on their part regarding the law or facts. This confusion by the taxpayer will generally cause them to be unable to give an exact amount of overpayment that has been made.
An example of this would be when an executor is handling the decedent’s estate and the exact value of one or more assets, or the correct amount of deductible administrative expenses, is presently uncertain. In this situation the executor would file a protective claim for refund in anticipation of knowing the exact amount to claim in the future.
Preparing Protective Claim for Refund
In preparing the claim, a good faith effort should be made to meet the guidelines that were previously given for regular claims using the best information available to the taxpayer. The taxpayer should use this information to file the claim on the proper forms, state the grounds for the claim, state the facts that are present, and sign the claim for refund under penalty of perjury.
It is important to understand that with a protective claim for refund, once the contingency takes place sometime in the future, the taxpayer can amend the claim for refund to show the exact amount that they were unable to estimate in the beginning.
Other Facts Regarding Protective Claims
SCA 199941039 add that while a valid protective claim need not state a particular dollar amount or demand an immediate refund, it must:
1. Identify and describe the contingencies affecting the claim
2. Be sufficiently clear and definite to alert the IRS to the essential nature of the claim
3. Identify a specific year or years for which a refund is sought
Once the contingence that the taxpayer is waiting on has occurred, the IRS can proceed in processing the claim for refund and make a decision whether to allow or disallow the claim.
Alternative to a Protective Claim
An alternative way to filing a protective claim is to file a formal claim for refund and then request the IRS to suspend the two year limitation period for filing suit pending the resolution of the contingency. This will effectively suspend the limitation period by the taxpayer and the stop the IRS from having the ability to execute Form 907 (Agreement to Extend the Time to Bring Suit) within the two year period.