Tax laws regarding Protective Claims for refund

  • July 16, 2015
  • David Shindel

corruptionProtecting your right to a tax refund:

The right to receive a tax refund at times is uncertain, contingent on the outcome of audits, litigation or other future events.  The amount of the refund may also be uncertain.

For example there might be an IRS audit that involves a dispute over the basis of a building for depreciation purposes. This dispute may take years to resolve and the outcome currently is uncertain. Depreciation expense for this building is impacted and must be reported every year regardless of the dispute. The tax position is therefore uncertain and the depreciation expense may change for all of the subsequently filed returns.

Unfortunately there are also time limits, imposed by law, for taxpayers to file for refunds. These time restrictions are known as statutes of limitations.  They generally mean that the right of a taxpayer to a tax refund expires – in most situations within two or three years.

The challenge then is to keep the statute open for this issue as tax returns can only be amended within three years after filing by the taxpayer.

Filing a Protective Claim to keep the statutes open:

There is a provision in tax law, known as a “Protective Claim”, designed specifically to keep statutes open for these types of situations. Their use is not well known or understood yet they can be at times an essential tool for tax recovery.

There is no specific form for a protective claim.  The taxpayer can file an amended return with all of the relevant information and identify the filing as a protective claim or the taxpayer can file a formal claim and include the details for the claim and the year(s) involved.

Without this type of protection, subsequent deductions may be lost.