The statute of limitations (SOL) for an interest claim runs two, three, or six years depending on whether the interest you’re claiming arose out of an underpayment or overpayment. Understanding which limitations period applies is an essential step in protecting your rights to file an interest claim. Congress has clearly distinguished between interest charged on a tax deficiency and interest paid by the government for an overpayment. The IRC Title 26 and Title 28 of the U.S. Code clearly sets forth these varying statutes of limitations for each type of interest claim.
SOL for Underpayment Interest Claims
If you anticipate making a claim for interest paid on an underpayment, refer to IRC Sec. 6511 for the applicable statute of limitations. Generally, for a claim involving a credit or refund for overpaid interest on a tax underpayment, the statute of limitations is the later of:
- 2 years from the date of payment, or
- 3 years from the date the return was filed
An exception may, however, extend the limitations period. If you consent to extend the Assessment Statute Expiration Date (ASED), the statute of limitations is six months from the new ASED. In all cases, the statute of limitations for underpayment interest claims is tied to the underlying return’s filing date or payment date. Interest charged on a tax deficiency is considered as part of the tax, according to the U.S. Court of Claims in Alexander Proudfoot v. United States. Thus, any interest on a tax deficiency is treated the same as the underlying tax for refund purposes. Therefore, the statute of limitations for underpayment interest is controlled by Title 26 and is the same for filing income tax claims.
SOL for Overpayment Interest Claims
For an interest claim relating to a refund for an overpayment, the applicable statute of limitations is not contained in Title 26, but in 28 U.S. Code Sec. 2401 and 2501. Generally, the limitations for an interest claim for an overpayment interest is six years from the date of allowance of the refund. The six years only begins to run when the refund is allowed—and the refund is allowed on the date the IRS Commissioner or Delegate signs the schedule on which the overpayment is listed.
One cautionary note: The claim for a refund on overpayment interest—made through the filing of Form 843—does not stop the running of the six-year SOL. In this case, the only way to fully protect your interest rights is to file a civil lawsuit against the federal government before the six-year period expires.
SOL for Interest Netting Claims
The overlapping-tax-periods requirement has changed to taxpayers’ benefit. The Second Circuit Court of Appeals in Exxon Mobil v. Commissioner (08/08/2012) has dismissed the IRS requirement that the statute of limitations (SOL) on both underpayments and overpayments remain open. Instead, it permitted interest netting provided the SOL for only one leg of an overlapping period has not expired. The court stated further “Congress clearly intended that taxpayers benefit from retrospective global interest netting even when one leg of the overlapping period had expired. Further, the zero net interest rate required by Code Sec. 6621(d) can be achieved either by increasing the overpayment interest owed to a taxpayer or decreasing the underpayment interest owed by a taxpayer. Since it is not necessary to adjust the interest computation for both the underpayment leg and the overpayment leg in order to achieve the zero net interest rate, it is not necessary for the limitations period to be open for both legs.”
It has been Ashland’s experience that the IRS has processed netting claims consistent with the Exxon Mobil decision. Taxpayers are advised to check on netting opportunities by requesting a new transcript each year to determine if interest paid or received during the past year for current or past tax years has created a new overlap period for netting. Ashland performs netting services for our clients each year, saving them hundreds of thousands and in some cases, millions of dollars each year.