IRS addresses limitation periods for a deficiency tied to NOL carrybacks

Plain-English summary

The IRS advised that a corporate taxpayer's later assessment was timely because the deficiency was attributable to a net operating loss carryback and the assessment period for the loss year remained open under an extension. The memorandum also analyzed whether a refund would be available if the assessment were barred, concluding that any refund could be reduced by additional underpayment interest and erroneously paid overpayment interest. It distinguished interest tied to an earlier assessment, which could be recovered only by offset, from interest tied to the later assessment, which could still be assessed and collected within the applicable period. Erroneously paid overpayment interest could not be assessed as tax or recovered through an expired erroneous-refund suit, but could be offset against a refund involving the same taxpayer, tax type, and tax period.

Ruling snapshot

• Question: Did the limitation periods bar the assessment, refund the related payments, or permit further collection of interest?
• Outcome: Advice given. The later assessment was timely, subject to the stated interest and offset rules.
• Key authorities: IRC §§ 6501, 6411, 6401, 6402, 6511, 6532, 6601, and 6611.

Full text (IRS public release)

                   INTERNAL REVENUE SERVICE
         NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM

                                        May 17, 2013

                                             Third Party Communication: None
                                             Date of Communication: Not Applicable

Number: 201335013
Release Date: 8/30/2013
Index (UIL) No.: 6501.00-00, 6501.01-00, 6411.00-00, 6404.04-00, 6601.12-00
CASE-MIS No.: TAM-139384-12

Chief, Appeals Office
Chicago

  Taxpayer's Name:                           --------------------------------------------------------------
  Taxpayer's Address:                        -----------------------------------------------
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  Taxpayer's Identification No               -----------------
  Year(s) Involved:                          -------
  Date of Conference:                        ------------------------

LEGEND

Taxpayer: ---------------------------------------------------------------

Year 1: -------
Year 2: -------
Year 3: -------
Year 4: -------
Year 5: -------
Year 6: -------
Year 7: -------
Year 8: -------
Year 9: -------
Year 10: -------
Year 11: -------
Year 12: -------
Year 13: ----------

Date 1: --------------------
Date 2: ------------------------

TAM-139384-12 2

Date 3: ------------------------
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Amount 1: ----------------
Amount 2:----------------------
Amount 3: ------------------
Amount 4: ----------------
Amount 5: ----------------
Amount 6: --------------
Amount 7: ----------------
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Amount 9: ----------------
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Amount 13: --------------

TAM-139384-12 3

Amount 14: ----------------
Amount 15: ----------------
Amount 16: --------------
Amount 17: ------------------
Amount 18: --------------
Amount 19: ----------------
Amount 20: ----
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Amount 29: ----------
Amount 30: ------------------
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Amount 32: ------------------
Amount 33: --------------------
Amount 34: ----------------
Amount 35: --------------
Amount 36: -------
Amount 37: --------------------
Amount 38: --------------
Amount 39: --------------------

ISSUES:

1. Does the statute of limitations bar the Date 2 assessment of an income tax
   deficiency for tax year 1 in the amount of Amount 1?

2. If yes, is Taxpayer entitled to any refund of tax as a result of the barred
   assessment?

3. Can the Service now assess and collect any additional interest it determines to
   be due from Taxpayer for tax year 1, based on either the Date 1 or the Date 2
   assessment? Can the Service recover any overpayment interest erroneously
   paid out for tax year 1?

CONCLUSIONS:

1. No. The Date 2 assessment of Amount 1 for tax year 1 was properly assessed
   within the period provided for by section 6501(h) of the Internal Revenue Code:
   TAM-139384-12 4

     the deficiency assessed was attributable to an adjustment to a net operating loss
     carryback from Taxpayer’s tax year 2, and the period of limitations on
     assessment was open for Year 2 pursuant to an extension under
     section 6501(c)(4).
   

   2. Even if the statute of limitations barred the assessment done on Date 2,
      Taxpayer may not be entitled to a refund of tax for Year 1. Although the Date 2
      assessment would have to be abated, any resulting refund should be offset by
      additional underpayment interest due for Year 1 and by any overpayment interest
      erroneously paid to Taxpayer.

   3. No. The Service may not assess additional underpayment interest that it
      determines to be due based on the Date 1 assessment. Such interest may only be
      recovered through offset of a refund for an amount paid before the assessment
      statute expiration date (ASED) for the underpayment interest. On the other hand,
      additional underpayment interest related to the Date 2 tax assessment may be
      assessed and collected up through Date 3. Because the periods of limitation on
      filing an erroneous refund suit for tax years 1 and 2 have expired, excessive
      overpayment interest can only be recovered by offset against any refund due
      Taxpayer for the same type of tax and tax period.

FACTS:

Taxpayer filed a U.S. Corporation Income Tax Return (Form 1120) for its Year 1 tax
year, on which it reported a tax liability of Amount 2, which was assessed and paid on
Date 4. On Date 5, Taxpayer received an Amount 3 tentative refund for Year 1, which
resulted from carrying back to Year 1 tentative net operating losses and credits from
its Year 3 tax year. On Date 6, Taxpayer received an Amount 4 tentative refund for Year 1,
this one from carrying back tentative net operating losses and credits from its Year 2 tax
year.

Audit of Tax Year 1
The Service audited and adjusted Taxpayer’s Year 2, 1, and 3 tax years. The Service
completed a Form 4549-A (Income Tax Changes) reflecting the proposed examination
changes to Taxpayer’s tax liabilities for the tax years 2, 1, and 3 as of Date 7.1 These
proposed adjustments included a net deficiency in income tax due from Taxpayer for tax
year 1 in the amount of Amount 5. Taxpayer and the Service entered into an agreement
under section 6501(c) to extend the period for assessment of a deficiency for tax year 1
to Date 8. Before Date 8, Taxpayer executed a Waiver of Restrictions on Assessment
and Collection of Deficiency in Tax and Acceptance of Overassessment (Form 870),
whereby Taxpayer agreed to waive the restrictions on assessing the Amount 5 income-
tax deficiency for its Year 1 tax year.

1
The Form 4549-A is attached as Exhibit A.
TAM-139384-12 5

This agreed deficiency of Amount 5 consisted of:

  (1) a decrease in Taxpayer’s Year 1 tax liability of Amount 6, attributable to Year 1
      general adjustments;
  (2) an increase in Taxpayer’s Year 1 tax liability of Amount 7, attributable to the
      partial recapture of the Amount 3 tentative carryback allowance from Year 3; and
  (3) an increase in Taxpayer’s Year 1 tax liability of 8, attributable to the partial
      recapture of the Amount 4 tentative carryback allowance from Year 2.

Computations Based on an Erroneous Form 2285
Because the agreed deficiency of Amount 5 included partial recaptures of the tentative
allowances resulting from the carrybacks from Year 3 and Year 2, an interest
computation under the restricted-interest provisions of the Internal Revenue Code was
required. To compute this restricted interest, the revenue agent prepared a Form 2285,
Concurrent Determinations of Deficiencies (Increases in Tax) and Overassessments
(Decreases in Tax) in Cases Involving Restricted Interest Provisions of the Internal
Code.2 This form correctly reflected the Amount 5 net deficiency to be assessed for the
1993 tax year. However, and contradicting the Form 4549-A, the Form 2285 mistakenly
reflected that this deficiency consisted of:

  (1) a decrease in Taxpayer’s Year 1 liability of Amount 9 (rather than Amount 6)
      attributable to Year 1 general adjustments (Form 2285, line 11 column(a)); and
  (2) an increase in Taxpayer’s Year 1 tax liability of Amount 4 (rather than Amount 8)
      attributable to a partial recapture of the tentative carryback allowance from Year
      2 (Form 2285, line 11 column (d)).

The Form 2285 correctly reflected that this deficiency consisted of an increase in
Taxpayer’s Year 1 tax liability of Amount 7 attributable to a partial recapture of the
tentative carryback allowance from Year 3 (Form 2285, line 11 column (c)).

The above two errors on this Form 2285 were caused when the revenue agent
mistakenly included on line 5 column (a) (1993 “Current Tax Credits”) an Amount 10
minimum tax credit that originated in Year 2.3 This error resulted in an incorrectly
stated line 5 column (a) amount of Amount 11. The line 5 column (a) amount should have
included only those credits attributable to the Year 1 tax year itself, in this case, Amount
12.

Like a domino effect, this error caused another error on this Form 2285: the Year 1 tax
liability attributable to general adjustments, instead of the correct amount of (Amount 6),
TAM-139384-12 6

was shown as (Amount 9), a difference of Amount 10. See line 11 column (a) (“Net
increase (decrease) in tax”). And, again like a domino effect, this error caused another
error: the Year 1 tax liability attributable to recapture of the tentative carryback
allowance from the tax year 2 was shown to be Amount 4, rather than the correct
amount of Amount 8, again a difference of Amount 10. See line 11 column (d).4 These
entries on the Form 2285 made it seem as though the Service had recaptured Amount
10 more of the Amount 4 tentative operating loss from Year 1 that Taxpayer had carried
back to Year 1 than had actually been recaptured during the audit, i.e., Amount 8.

Adjustments Made to the Year 1 Account, including interest
Based upon the entries on the Form 2285, both the correct and erroneous entries, the
Service made the following assessments and abatements on the Taxpayer’s Year
1 account:

Code Date Entered Effective Date Amount of Assessment or
(Abatement)
3015 Date 9 Date 11 (Amount 9)
3086 Date 9 Date 12 Amount 7
308 Date 10 Date 13 Amount 4

The result of the foregoing assessments and abatement was a net assessment of
Amount 5, the correct amount of the net deficiency in income tax due from Taxpayer for
the tax year 1. Although the result of these adjustments was a net deficiency, the
Amount 9 abatement placed Taxpayer’s account into an overpaid status as of its
effective date, Date 11. Because the abatement was overstated by Amount 10, the
running balance on the account was overstated by that amount -- until that
overstatement was “corrected” by the Amount 4 assessment, which as outlined above

was overstated by the same amount. But this correction did not occur until Date 13, the
effective date of the overstated assessment. As a result, overpayment interest accrued
on an erroneously high running balance for over two years, resulting in a windfall of
interest to Taxpayer. To wit, the transcript reflects TC 770 allowances of credit
(overpayment) interest of Amount 13 and Amount 14 on Date 14 and Date 9,
respectively.7 On Date 14, Taxpayer received a refund in the amount of Amount 15.

Audit of Tax Year 2

4
The increase in the Year 1 liability attributable to the Year 3 NOL capital loss carryback was correctly
reflected on the Form 2285 at line 11(c) as Amount 7, and was correctly assessed by the Service. In
addition, the Year 1 net deficiency of Amount 5 remained the same: (Amount 9) + Amount 7 + Amount 4
= Amount 5. Compare : (Amount 6) + Amount 7 + Amount 8 = Amount 5.
5
Transaction Code 301 is Abatement of Tax by Examination
6
Transaction Code 308 is Additional Tax Assessment with interest.
7
Taxpayer’s transcript for Tax Year 1 is attached as Exhibit C.
TAM-139384-12 7

Subsequently, Taxpayer’s Year 2, Year 5, and Year 6 tax years were examined. During
this audit, Taxpayer and the Service executed an agreement under section 6501(c) to
extend the period for assessment of a deficiency in income tax for the tax year 2 to Date
15.8 Taxpayer appealed the examination findings for those tax years to Appeals, where
all issues were settled. On Date 18, Taxpayer signed Form 870-AD, Offer to Waive
Restrictions on Assessments and Collection of Tax Deficiency and to Accept
Overassessment, reflecting that settlement.

Although there was no deficiency for Year 2, the Year 2 settlement resulted in a number
of adjustments, as reflected on the Audit Statement (Form 3610)9 and supporting
Statement of Income Tax Changes (Form 5278)10, including:

  (1) reducing the allowable net operating loss carryback from Year 2 to Year 4 by
      Amount 16;
  (2) increasing the alternative tax net operating loss carryback from Year 2 to Year 4
      by Amount 17; and
  (3) reducing the general business credit utilized for Year 4 by Amount 18.

As indicated in the Form 3610 Audit Statement, these adjustments resulted in a Amount
19 overpayment of income tax due to Taxpayer for the tax year 4 and the Amount 1
deficiency for Year 1 at issue herein.

Correction of the first Form 2285
Because the Year 1 deficiency of Amount 1 resulted from the foregoing adjustments to
carrybacks from the Year 2 tax year, a Form 2285 again needed to be prepared. In
preparing the new Form 2285, the Appeals Tax Computation Specialist
(TCS) discovered the errors on the prior Form 2285 discussed above.

To reiterate, the revenue agent who prepared the prior Form 2285 mistakenly included,
as a Year 1 general adjustment, an Amount 10 minimum tax credit that was from Year

2. The TCS sought to correct this error by preparing a new Form 2285 for Year 1, dated
   Date 19.11 On this new form, the TCS entered the correct current tax credit general
   adjustment amount of Amount 12, and accounted for the Amount 10 minimum tax credit
   as a tax credit carryback arising in the Year 2 tax year. The shifting of this minimum tax
   credit to the Year 2 column where it belonged resulted in:
   8
   As indicated in Taxpayer’s letter dated Date 16, Taxpayer initially contended that the period of
   limitations for assessing an income-tax deficiency for its Year 2 tax year expired on Date 17, but now
   agrees that the period of limitations for that year was validly extended to Date 15.

9
The Form 3610 is attached as Exhibit D.
10
This Form 5278 is attached as Exhibit E.
11
This corrected Form 2285 is attached as Exhibit F.
TAM-139384-12 8

   (1) an increase of Amount 10 in the Year 1 tax liability attributable to general
   adjustments (the first form 2285 erroneously had (Amount 9) rather than the correct
   amount of (Amount 6), a difference of Amount 10), and

   (2) an offsetting decrease in the Year 1 tax liability attributable to the recapture of
   the tentative allowance (the first Form 2285 erroneously had Amount 4 rather than the
   correct amount of Amount 8, again a difference of Amount 10, and

   (3) a tax deficiency of Amount 20 for Year 1.

None of these adjustments are reflected on the transcript of the Year 1 Form 1120
account. However, based upon this corrected Date 19 Form 2285, the Service made
interest assessments of Amount 21 and Amount 22 for Year 1 on Date 20. Then, based
on the corrected amounts in the Date 19 Form 2285, the TCS prepared another
Form 2285 on Date 21 to correctly reflect the adjustments agreed to for the tax year
2.12 After adjusting the Year 1 tax liability to account for the losses and credits carried
back from Year 3 and Year 1, to which Taxpayer had agreed, the Date 21 Form 2285
showed that Taxpayer was liable for a net deficiency in income tax for the tax Year 1 in
the amount of Amount 1.

Adjustments to Tax Year 1 based on the Audit of Tax Year 2
The net deficiency of Amount 1 was comprised of:

   (1) an Amount 23 decrease in Year 1 tax due to an increased carryback allowance
       from Year 3;
   (2) an Amount 24 increase in Year 1 tax due to the increased alternative tax net
       operating loss carryback from Year 3 to Year 4 (because more of the Year 2
       alternative tax net operating loss was applied to Year 4, there was less
       alternative minimum tax in Year 4, and less alternative minimum tax credit in
       Year 1); and
   (3) an Amount 25 decrease in Year 1 tax due to a carryback allowance from Year 5.

The Amount 1 net deficiency for Year 1 was assessed on Date 2, within the Date 15
period of assessment under section 6501(h) for assessments of deficiencies attributable
to carrybacks from Year 2, but after the period of limitations under section 6501(a) for
Year 1, which had expired on Date 8. This time, the Service assessed only the net
deficiency for Year 1, instead of making the three separate adjustments outlined above.

Further Adjustments to the Year 1 Account, including interest
Related to this Amount 1 assessment, the Service, on Date 22, abated underpayment
interest of Amount 26 and credited overpayment interest of Amount 27, which, when
TAM-139384-12 9

combined with the interest entries made on Date 20 to correct the earlier Form 2285,
resulted in a net interest assessment of Amount 28. The Service allowed additional
overpayment interest of Amount 29 on Date 23. The Service also allowed and refunded
additional overpayment interest of Amount 30 on Date 24.

In Date 25, payment of this Amount 1 deficiency for the tax year 1 was satisfied in large
part by transferring Amount 31 from Taxpayer’s Year 4 account, which amount was
originally paid by Taxpayer on Date 26. The remaining portion of the deficiency and
related interest (Amount 32) was satisfied by a portion of the advance interest payment
of Amount 33 that was applied to the Year 1 account from --------- Year 6 Form 1120
account on or about Date 27.13

The Current Controversy
On Date 16, Taxpayer filed a claim for refund of all amounts used to satisfy the Date 2
assessment of the Year 1 deficiency of Amount 1 plus interest. Specifically, Taxpayer
claimed a refund of: (1) Amount 32, which is the un-refunded portion of Taxpayer’s
Amount 33 advance interest payment made on Date 28, and (2) the Amount 31
payment applied from Taxpayer’s Year 4 account in processing cycle --------------
(approximately Date 29) with an effective date of Date 26. The claim totals Amount 39,
including allowable interest. Taxpayer argues that the second assessment on Date 2
based on the Year 2 carryback could not be made because the Service had already
made an assessment for that year in the full amount of the section 6411 tentative
refund. To support its position, Taxpayer points to the transcript showing a TC 308
assessment of Amount 4 on Date 10, which assessment was based on the erroneous
Form 2285 -- where the Year 1 tax liability attributable to recapture of the tentative
carryback allowance from the tax year 2 was shown to be Amount 4, rather than the
correct amount of Amount 8.

By letter to Taxpayer dated Date 30, the Service formally disallowed Taxpayer’s claim
for refund. Taxpayer appealed. Taxpayer and Appeals now seek technical advice
regarding the issues set forth above.14

13
The advance interest payment of Amount 33 that was applied to the Year 1 account from Taxpayer’s
Year 6 Form 1120 account on or about Date 27 was ultimately applied as follows: (1) Amount 34 was
transferred to --------- Year 6 Form 1120 account; (2) Amount 35 was transferred to its Year 7 Form 1120
account, (3) Amount 36 was transferred to a Civil Penalty account for Year 8; and (4) Amount 37 was
refunded to Taxpayer (along with Amount 38 of overpayment interest). That left Amount 32 remaining on
Taxpayer’s Year 1 Form 1120 account.
14
Taxpayer and Appeals have timely executed successive Agreements to Extend the Time to
Bring Suit (Form 907), which have extended the period of time for Taxpayer to file suit on Taxpayer’s
claim for refund in the amount of Amount 39 for the taxable year 1 until Date 31.
TAM-139384-12 10

LAW AND ANALYSIS:

  1. The assessment made on Date 2 was timely because it was made within the
     I.R.C. § 6501(h) period of limitations for deficiencies attributable to a net
     operating loss carryback.

In general, the amount of any tax must be assessed within three years after the return
was filed. I.R.C. § 6501(a). This three-year period may be extended by a number of
circumstances, including when the Service and the taxpayer agree in writing to extend
the time for assessment. I.R.C. § 6501(c)(4). Further, when a deficiency in tax is
attributable to the application to the taxpayer of a net operating loss carryback or a
capital loss carryback, such deficiency may be assessed at any time before the
expiration of the period within which a deficiency for the tax year of the net operating
loss or net capital loss that results in such carryback may be assessed. I.R.C.
§ 6501(h). If a taxpayer receives a tentative refund under section 6411, the Service will
be able to assess a deficiency attributable to any adjustment in the loss year, but only up
to the amount of the tentative refund. I.R.C. § 6501(k). The overarching general
principle to be applied when analyzing limitations periods is the principle that statutes of
limitation barring the collection of taxes must be strictly construed in favor of the
government. Badaracco v. Commissioner, 464 U.S. 386 (1984).

There is no definition of “attributable to” in either section 6501(h) itself or the Internal
Revenue Code in general. Case law has defined the term to mean that the proposed
assessment “may be traced directly to” the carryback. First Chicago Corp. v.
Commissioner, 742 F.2d 1102, 1104 (7th Cir. 1984); Herman Bennett Co. v.
Commissioner, 65 T.C. 506, 509 (1975). In First Chicago, the tax years at issue were
1971, 1972 and 1974. The taxpayer sustained an operating loss in 1974, which it
carried back to 1971. This reduced the tax due for 1971, which in turn reduced the
amount of tax carried over from 1971 to 1972, resulting in a 1972 deficiency. At the
time of the 1972 assessment, the section 6501(a) period of limitations had expired for
that year. However, the period of limitations for 1974 assessments remained open. The
Seventh Circuit found that the 1972 assessment was timely, because “the 1972
adjustment [was] in fact an automatic mechanical adjustment due directly to the 1974
carryback.” Id. at 1107. While the statute refers only to a carryback, the court further
found that a deficiency resulting from a carry-forward was still directly traceable to the
1974 carryback.

In this case, the audit of tax year 2 resulted in an increased alternative tax net operating
carryback loss (ATNOL) for that year. This increased ATNOL was carried back to Year
4, where it decreased the total alternative minimum tax for that year.15 Then, the
reduced Year 4 alternative minimum tax resulted in a reduced minimum tax credit
carryover to Year 1 and, thus, a net deficiency for that Year 1 year (Audit Statement,

15
This generated a refund for tax year 4 (Audit Statement, Schedule 2, Lines 17(a) and 24).
TAM-139384-12 11

Schedule 2, lines 15(c) and 21). Thus, the Year 1 assessment was a mechanical
automatic adjustment directly traceable to the Year 2 carryback adjustment. The
present case is not distinguishable in any meaningful way from First Chicago, and the
assessment made for Year 1 on Date 2 was timely.

Taxpayer asserts that the second assessment based on the Year 2 carryback could not
be made because the Service had already made an assessment for that year in the full
amount of the section 6411 tentative refund. In support of this argument, Taxpayer
cites section 6501(k). While it is true that amounts that may be assessed “solely by
reason of” section 6501(k) may not exceed the amount of a prior tentative refund, the
assessment at issue in this case was not assessed under section 6501(k). When a
deficiency is directly traceable to a carryback, the relevant assessment statute is
section 6501(h), and not section 6501(k). See Suivski v. Commissioner, T.C.
Memo. 1993-291. Section 6501(k) allows the Service to make an assessment of
deficiencies that are not attributable to the carryback, and it is those types of
assessments that are limited in amount. When making an assessment solely under
section 6501(h), as was done in this case, there is no amount limitation. Id.; see also
Jones v. Commissioner, 71 T.C. 391, 397 (explaining the difference between sections
6501(h) and 6501(m) (now 6501(k)); Treas. Reg. § 301.6501(m)-1(a)(2), example
(explaining that the amount limitations apply when an assessment is made for a
deficiency not attributable to the loss carryback)). Because section 6501(k) does not
apply to the assessment made for tax year 1 in year 9, no amount limitation applies.

Further, the erroneous Year 7 assessment of Amount 4 did not “recapture” the Year 2
tentative allowance in full because that assessment was offset by the equally erroneous
abatement of Amount 9. Again, these errors contradicted the Form 4549-A audit
statement, which both parties agree is correct, and were made due to the incorrect
Form 2285, which was prepared solely for purposes of making an interest computation.
To that end, the only entry on the transcript that ties the assessment to Year 2 is the
interest computation date of Date 13. On the other hand, the abatement had an interest
computation date of Date 11, linking that adjustment to the Year 1 tax year. When
these two erroneous adjustments were combined with the correct assessment of
Amount 7, the result was a net deficiency of Amount 5 that matched the amount
determined on the Form 4549-A. The only true error on the account was that interest
was calculated incorrectly (in Taxpayer’s favor) due to the overstated abatement applied
as of Date 11. This error also prevented the correct amount of underpayment interest to
be computed on the net deficiency, and resulted in Taxpayer receiving overpayment
interest when, in fact, it owed a deficiency. Accordingly, the assessment of the Amount
1 deficiency for the taxable year 1 was timely made on Date 2 because it was
attributable to an adjustment of a net operating carryback from the taxable year 2 and
was made within the section 6501(h) period of limitations for that taxable year.

2. If the assessment made on Date 2 must be abated because it was made beyond
   the period of limitations, any refund would be offset by additional underpayment
   TAM-139384-12 12

interest due for the 1993 tax year and by offset of overpayment interest erroneously
paid to Taxpayer.

Abatement of the Date 2 Assessment
The term “overpayment” includes that part of the amount of the payment of any federal
tax that is assessed or collected after the period of limitation expires. I.R.C. § 6401(a).
In the case of an overpayment, the Service may credit the amount of such
overpayment, including interest, against any liability in respect of a federal tax on the
part of the person who made the overpayment and shall refund any balance to such
person. I.R.C. § 6402(a). A claim for credit or refund of any overpayment of any federal
tax of which the taxpayer is required to file a return shall be filed by the taxpayer within
three years from the time the return was filed or two years from the time the tax was
paid, whichever period expires later. I.R.C. § 6511(a).

Any tax assessed and paid after the period of limitations on assessment expires
constitutes an overpayment under section 6401(a) that should be refunded under
section 6402(a) if the taxpayer has filed a timely refund claim in accordance with
section 6511(a). See Rev. Rul. 74-580, 1974-2 C.B. 400. Accordingly, a payment of
tax that was assessed and paid after the period of limitations on assessment had
expired, as provided in section 6501, can be refunded within two years after payment, if
a claim for refund is filed. Id.; IRM 25.6.1.10.2.5.6.2.

Credits applied via offset with TC 700, 706, 730, or 736 have a refund statute of two
years from the cycle date the credit was applied. IRM 20.2.5.2; Republic Petroleum
Corp. v. United States, 613 F.2d 518, 525, n.19 (5th Cir. 1980). Here, with respect to its
Year 6 Form 1120 account, Taxpayer made an Amount advance payment of interest on
Date 28. On or about Date 27 (in processing cycle ------------), an unrefunded portion of
this advance payment, Amount 32, was offset to the Year 1 account with TC 700. With
respect to its Year 4 Form 1120 account, Taxpayer made an Amount 31 payment on
Date 26. In Date 30 (in processing cycle ------------), this amount was offset to the Year
1 account with TC 700. Both the Date 27 and Date 30 offset payments were within two
years from the date of Taxpayer’s Date 32 refund claim.

Assuming the period of limitations on assessment for the taxable year 1 expired on Date
8, then the assessment made on Date 2 was barred by the statute of limitations and the
payments of Amount 32 and Amount 31 made on Date 27 and Date 30, respectively,
would be subject to refund because they would constitute an overpayment under
section 6401(a) that is refundable under section 6402(a). See Rev. Rul. 74-580.

Offset of Additional Underpayment Interest
Any underpayment interest on any tax may be assessed and collected at any time
during the period within which the tax to which such interest relates may be collected.
I.R.C. § 6601(g). The Service can offset any additional underpayment interest against
TAM-139384-12 13

any tax refund owed the taxpayer under section 6402(a),16 even if the statute of
limitations on assessment of the underpayment interest has expired, as long as the
refund is for an amount paid before the ASED for the underpayment interest. Fisher v.
United States, 80 F.3d 1576 (Fed. Cir. 1996); Rev. Rul. 85-67, 1085-1 C.B. 364 (even
though the Service did not assess before the ASED, a payment made before the ASED
does not constitute an overpayment of tax under section 6401(a)). Underpayment
interest is part of a taxpayer’s tax liability and is assessable in the same manner as a
tax. See Fisher, 80 F.3d at 1580; I.R.C. § 6601(e) (stating that interest on tax
underpayments “shall be assessed, collected, and paid in the same manner as taxes”
and that any reference “to any tax imposed by this title shall be deemed also to refer to
interest imposed by this section on such tax”). Thus, underpayment interest that is
owed is taken into account in determining whether an overpayment exists. If an
overpayment does not exist (because of the additional underpayment interest owed),
the government is permitted to offset the underpayment interest against a claimed tax
refund even if the statute of limitations on assessment of the interest has expired, as
long as the refund claim is for an amount paid before the ASED for the underpayment
interest. See Fisher, 80 F.3d at 1580; Rev. Rul. 85-67.

Because of the erroneous transcript entries made in Year 7, overpayment interest
accrued on an erroneously high credit balance for over two years, resulting in a windfall
of interest to Taxpayer. Similarly, this credit balance prevented underpayment interest
from correctly running on the assessed tax liability. Any additional underpayment
interest Taxpayer owes on the Year 7 assessments may be used to offset any refund of
payments made in Year 10 and Year 9 because:

    the Year 9 assessment was satisfied by amounts paid in Date 27 and Date 25;
     and
    the section 6601(g) period of limitation on assessment of interest on the Year 7
     assessment did not expire until Date 10.

Offset of Erroneously Allowed Overpayment Interest
Excessive statutory interest on overpayments under section 6611 cannot be assessed
because there is no statutory authority for assessing the amount of money erroneously
paid as overpayment interest. See Sunoco Inc. v. Commissioner, 663 F.3d 181, 196
(3d Cir. 2005) (“overpayment interest, i.e., interest owed to the taxpayer by the
government, is not ‘a part of, or even related to, a taxpayer's tax liability’ and is not
‘assimilated in treatment to the principal amount of a tax.’”) (citations omitted). Thus,
the erroneous payment of overpayment interest may only be recovered by voluntary
payment, by filing suit for an erroneous refund under section 7405, or by the common-
law right of offset. See I.R.M. 20.2.4.11.2(2). The period of limitations on bringing an

16
In the case of any overpayment, the Secretary, within the applicable period of limitations, may credit
the amount of such overpayment, including any interest allowed, against any liability in respect of an
internal revenue tax on the part of the person who made the overpayment and shall refund any balance to
such person. I.R.C. § 6402(a).
TAM-139384-12 14

erroneous refund suit is two years from the making of the refund. I.R.C. § 6532(b). The
common-law right of offset, however, is not subject to any period of limitation.17 See
Reiter v. Cooper, 507 U.S. 258, 264 (1993) (Under the doctrine of common-law
recoupment, a claim that involves “the setting off against asserted liability of a
counterclaim arising out of the same transaction,” is “generally not barred by a statute of
limitations so long as the main action is timely.”); Lewis v. Reynolds, 284 U.S. 281
(1932) (When considering a taxpayer’s refund claim, the Service has the right to
recompute amounts owed by a taxpayer without a period of limitation, so long as the
recomputation involves the same taxpayer, the same tax, and the same tax year as the
refund claim); Fisher, 80 F.3d at 1579-81; Dysart v. United States, 340 F.2d 624 (Ct. Cl.
1965). The erroneous payment of overpayment interest may be offset, without a period
of limitation, against any refund otherwise due the taxpayer so long as the offset
involves the same taxpayer, the same type of tax, and the same tax period to which the
refund is related. In this case, therefore, the Service may offset any refund of the Year
9 assessment with overpayment interest erroneously paid to Taxpayer.

 3. Additional underpayment interest that the Service determines to be due from
    Taxpayer for the Year 1 tax year with respect to the Year 7 tax assessment can
    be recovered only through offset. If the assessment made on Date 2 was not
    barred by the statute of limitations, any additional underpayment interest that the
    Service determines to be due from Taxpayer for the tax year 1 with respect to
    that Date 2 assessment can be assessed and collected. Overpayment interest
    cannot be recovered, unless it is offset against any additional refund owed
    Taxpayer for Year 1.

As discussed in issue 2 above, any underpayment interest on any tax may be assessed
and collected at any time during the period within which the tax to which such interests
relates may be collected. I.R.C. § 6601(g). When the assessment of tax has been
made within the period of limitations, the tax may be collected within ten years after the
assessment of the tax. I.R.C. § 6502(a).

Any additional underpayment interest that the Service determines to be due from
Taxpayer attributable to the deficiency assessed in Year 7 must have been assessed
before Date 32, ten years after the original assessment. Because this period has
expired, the Service cannot now assess any additional underpayment interest related to

17
The Federal Circuit held in Pacific Gas and Electric Co. v. United States, 417 F.3d 1375, 1381-83
(Fed. Cir. 2005), that the common-law right to offset erroneous overpayment interest against a taxpayer’s
refund for the same taxable year is subject to the statute of limitation that applies to erroneous refund
suits under sections 7405 and 6532(b). The Federal Circuit’s decision in Pacific Gas is erroneous. See
AOD-2006-02, 2006 WL 2830795. Congress has not imposed any statute of limitations on the recovery
of overpayment interest by means of offset against a taxpayer’s refund claim. See United States v.
Nashville, C. & St. L. Ry. Co., 118 U.S. 120, 125 (1886) (the sovereign is “not bound by any statute of
limitations unless Congress has clearly manifested its intention that they should be so bound.”)
TAM-139384-12 15

this Year 7 assessment. As discussed above, the Service can offset any additional
underpayment interest against any tax refund owed Taxpayer. I.R.C. § 6402(a).

As also discussed above, erroneous payments of overpayment interest may be
recovered by voluntary repayment, by filing suit for an erroneous refund under section
7405, or by offset. Offset may be applied without regard to any period of limitation
against any refund otherwise due the taxpayer, as long as the offset involves the same
taxpayer, the same type of tax, and the same tax period to which the refund is related.
If the erroneous payment of overpayment interest and the refund to be offset do not
arise from the same type of tax and same tax period of the same taxpayer, the offset
must be made within the applicable erroneous refund statute expiration date, which is
two years from the date of the erroneous payment. See I.R.C. § 6532(b);
IRM 20.2.4.11.2(3); IRM 21.4.5.3.1(1)(d).

The credits of overpayment interest to Taxpayer in the amounts of Amount 13, Amount
14, Amount 27, and Amount 29 on Date 14, Date 9, Date 22, and Date 23, respectively,
cannot be assessed because overpayment interest is not a tax liability. Neither can
these overpayment interest credits be recovered through an erroneous refund suit
under section 7405 because the two-year statute of limitations for bringing suit expired
in Year 11 and Year 12. Similarly, the refunds of overpayment interest to Taxpayer in
the amounts of Amount 15 and Amount 30 made on Date 14 and Date 24, respectively,
cannot be recovered because the two-year statute of limitations for bringing an
erroneous refund suit expired in Year 11 and Year 13. These credits and refunds of
overpayment interest, however, may be offset against any refund due Taxpayer, as long
as the offset involves the same type of tax and tax period to which the refund is
related.18

Because insufficient information has been provided, we cannot determine whether the
underpayment interest abatement of Amount 26 made on Date 22, was due to clerical
error or mistake of fact. Thus, until such information is provided the Service should not
reverse the underpayment interest abatement of Amount 26. Instead, the Service
would have to reassess before Date 3, when the statute of limitations on assessing the
interest expires See sections 6601(g), 6502(a). Because the Amount 1 tax deficiency,
to which the underpayment interest of Amount 26 relates, was assessed on Date 1, the
statute of limitations for assessing underpayment interest on this tax assessment will
expire on Date 3 – ten years from the date of the tax assessment.

18
Because the periods of limitations for recovering an erroneous refund have expired, the Service cannot
recover the overpayment interest by offset against any refund owed Taxpayer that relates to a different
type of tax or tax period.
TAM-139384-12 16

CAVEAT(S):

A copy of this technical advice memorandum is to be given to Taxpayer, but it may not
be used or cited as precedent. I.R.C. § 6110(k)(3).