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The road to obtaining a large tax refund can sometimes feel like the journey of a 1000 miles. In prior postings we have discussed the single step with which the journey typically begins – the refund claim. Today we’ll touch on a final step in the journey – review by the Joint Committee on Taxation (JCT).
Introduction to JCT’s Role in Tax Refunds
The JCT is a bicameral committee of the U.S. Congress charged with several responsibilities including the review of large tax refunds. Specifically, in the case of tax refunds in excess of $2,000,000 ($5,000,000 in the case of a C corporation), the IRS, once it agrees with a taxpayer that the refund is due, may not simply issue the refund. Section 6405 of the Internal Revenue Code requires that the IRS first submit a report to the JCT, giving the name of the person to whom the refund is to be made, the amount of such refund, and a summary of the facts. By statute, the IRS must afford the JCT 30 days to review the report before the refund is issued. As a matter of agency policy, the IRS generally does not issue refunds until the JCT review process is complete even if substantially longer than 30 days which is typically the case.
Upon completion of the review, JCT will issue either a clearance letter or SRM. The Clearance letter indicates that JCT does not disagree (without affirmatively stating its concurrence) with the IRS’s conclusion that the refund is warranted. An SRM outlines areas where the JCT disagrees with the IRS’s position and recommends a different outcome in whole or part. Ultimately, and importantly, the IRS is not bound by the JCT’s conclusions. They are recommendations only. Whether to issue the tax refund is ultimately within the authority of the IRS in ordinary refund claim and audit scenarios. A reason for this is that the JCT review process is not really intended as a procedure to second-guess the IRS in its determinations that taxpayers are due refunds.
The review is intended as a way to improve tax administration. The JCT review process enables the JCT to become familiar with specific issues in individual industries and to identify problems in the administration of the law. This includes whether there are transactions in which the law allows taxpayers to obtain unintended benefits. If the problem emanates from statutory language, the JCT may recommend legislative amendments to the Internal Revenue Code. When the problem emanates from IRS pronouncements or a lack of uniform application of the law, the JCT may request that the IRS clarify or reconsider its published positions or issue further guidance. Notwithstanding, for taxpayers seeking large tax refunds, the process presents yet another hoop to jump through (and additional delay) before the IRS will pay the refund due.
New IRS Guidance
On September 22, 2021, the IRS introduced a new webpage that provides information to taxpayers whose large refunds are subject to further review by the JCT. The webpage is currently quite basic but it will hopefully become more informative over time. Here are several highlights from topics it introduces, along with some further detail and context that the webpage does not supply.
First, the jurisdictional amount. Historically, the jurisdictional amount was the same amount for all taxpayers. The Tax Increase Prevention Act of 2014 increased the jurisdictional amount and created different thresholds for different taxpayers. For C corporations, it’s $5 million. For all other taxpayers, it’s $2 million. However the computation of the jurisdictional amounts is not always obvious. A useful tip that the new website provides is that the amount is on a net basis; that is, the amount of refund is reduced by the amount of any deficiency for the same type of tax and for “all of the taxpayer’s returns being reviewed by the IRS.” So if the IRS is conducting a Federal income tax examination for tax years 2017-2020, the jurisdictional threshold is the net refund amount for the four-year period.
Second, the JCT process is triggered from refunds determined on audit even if the taxpayer has not filed a refund claim. In general, the refund process commences when the taxpayer files a formal refund claim, typically on Forms 1120X (for corporations) or 1040X (for individuals) in the case of Federal income taxes. However during the IRS examination process involving large taxpayers, LB&I (the Large Business and International division of the IRS) there are procedures under which taxpayers submit Taxpayer Proposed Adjustments. The new website observes: “A refund claim may be made on an amended return or be made by a claim submitted during an examination.” A taxpayer operating under these LB&I procedures are not required to file a formal refund claim to gain access to the JCT; as long as the IRS approves the refund, it is eligible for review.
There are other aspects of and limitations to the JCT process that the website does not currently address, including its application in the minimum refund process, and, conversely, its inapplicability to court-ordered tax refunds and to quickie refunds under Section 6411.
For many taxpayers, the new IRS guidance should be a helpful starting point to understanding what to expect at mile 1000 of the journey, and may serve as a reminder that when seeking a large tax refund, the taxpayer should bear in mind this additional audience, the JCT, when articulating and documenting the justification for large tax refunds.
Peter A. Lowy, a shareholder in Chamberlain Hrdlicka’s Houston office, is best known for his tax controversy work and deep experience in the energy sector. He also advises corporations and other taxpayers in a broad spectrum of ...