If you are like most taxpayers, you want to close out your old tax years as soon as possible, especially when you are owed a refund. In many cases—refund or not—there are a surprising number of Internal Revenue Service procedures and documentation requirements to navigate after resolving or settling the issues in Exam, Appeals, or litigation. These hurdles can include closing agreements, stipulations, decision documents, and Form 870 or 870-AD. Taxpayers must take into account how best to close the years, protect any additional claims, if any, establish a precedent for future years (or not), and so on.
On top of all that, a separate process that often stands between you and your refund is Joint Committee review. Preparation of the required documentation begins with the IRS, and the process culminates in review by the congressional Joint Committee on Taxation (JCT). We focus here on the various stages of the Joint Committee process.
Question: When is Joint Committee review required, what should you expect, and how can you help the process along?
Before Treasury will issue your large refund or credit (more than $5 million for a C corporation or more than $2 million for other taxpayers, including tax, penalties, and interest), the refund generally must be reported to the congressional JCT for review.
Types of large tax refunds that generally require JCT review are income, estate, gift, and some excise tax refunds. In determining whether your refund exceeds the threshold amount for a single year or group of years reported together, the IRS follows somewhat complicated rules (spelled out in the Internal Revenue Manual) as to which amounts should be included and which refunds and deficiencies should be combined, and in which order (including what types of refunds must be combined—importantly, tentative refunds are separated from other refund amounts, as required by statute).
Tentative refunds generally are not subject to JCT review until the source year has been audited. The IRS also has discretion to issue refunds or credits attributable to certain disaster losses (deducted for the year before the loss) prior to JCT review.
Tip: Although you usually need to wait until all issues that were raised for the refund year (or group of tax years in a multiyear case) have been resolved, you may be able to obtain JCT review of a minimum refund prior to resolution of certain unagreed issues, if you are entitled to that refund regardless of the outcome of the unagreed issues and it will take substantial time to resolve those outstanding unagreed issues. This might apply when unagreed issues, for example, are awaiting the outcome of pending litigation.
A refund resulting from a court case that was resolved by a judge’s opinion is not reviewed by the JCT, whereas a settlement that results in a refund over the ($5 million or $2 million) threshold amount does require JCT review.
First Step: Preparation by IRS of Review Package
When congressional JCT review is required at the Exam or Appeals stage, IRS personnel who specialize in JCT reporting assist with preparation and assembly of the Joint Committee report and accompanying documents. The report provides context and explains the reason(s) for the refund. The supporting documentation includes tax computations, the Revenue Agent’s Report, any Appeals reports, closing agreements, Form 870 and/or Form 870-AD, and so on.
One of the most time-consuming steps in the process of preparing the review package for a complex multiyear case is the creation of the tax computation spreadsheets, which take into account carrybacks, carryback limitations, etc.
Tip: You can proactively put together tax computations and offer to share them with the IRS. The IRS will still create its own specially formatted schedules for the review package, but having yours as a starting point and basis for comparison should help advance the process and also ensure that any differences come to light and are worked out as early as possible. This can help you get your refund faster.
In a settled Tax Court case, IRS counsel and an IRS tax computation specialist need to prepare additional documentation prior to JCT review, including a (typically joint) decision and stipulation, computations, and underlying information on various forms.
What Do You Need to Sign?
The IRS may request that you consent to extend the statute of limitations for the relevant years to ensure that the IRS has time to get the case through JCT review.
You will generally also be asked to sign the relevant waivers and agreements (such as Form 870 at the Exam stage or Form 870-AD at the Appeals stage, plus any closing agreements) before JCT review. The taxpayer signs Tax Court decision and stipulation documents in a settled Tax Court case prior to JCT review as well.
Some or all of these documents likely will specify that they do not take effect until the JCT completes its review without objection, and the IRS often does not sign them until the JCT releases the case. This ensures that any changes suggested by the JCT can be implemented.
Tip: You should also provide a Form 8302 if you would like to receive your refund by wire transfer or direct deposit rather than by check.
Congressional JCT Review
Once the report is assembled and finalized, the IRS Joint Committee specialist (or counsel, in the case of litigation) forwards the report package to the congressional JCT in Washington, D.C., where Refund Counsel (JCT staff lawyers) perform the official JCT review.
As the JCT reviews the documentation, it may reach out to the IRS (or the Department of Justice in the case of a settlement in refund litigation) with questions, usually through informal phone calls or emails, and sometimes more formally in writing.
The JCT reviews refund cases so as to become familiar with specific issues in individual industries and to facilitate the consistent application of tax law. The JCT looks for problems in the administration of the law, particularly where there are unintended benefits to taxpayers. The JCT’s observations may result in recommendations to Congress to amend a statute or to the IRS to clarify, change, or issue new published guidance. In some instances, the JCT may request that the IRS or the DOJ reconsider the specific adjustments under review.
In our experience, the JCT usually does not recommend adjustments to the refund amount (or to the amount of net operating loss or credit remaining to carry forward), although occasionally it does suggest such changes when it finds that the IRS did not handle some issues correctly as a technical matter and the tax impact is significant.
When the JCT does request reconsideration of a refund, the IRS is permitted to override the request but generally tries to come to agreement with the JCT. The JCT may agree to the refund in a particular case but write a memo recommending an alternative way the IRS should handle the situation in the future. If the IRS and the congressional JCT do not agree to the refund as is, however, you may need to resolve the JCT issue(s) with Exam or Appeals (or potentially through litigation).
What Happens After JCT Review?
Once the JCT has completed its review, assuming it takes no exception to the refund(s) or that any disagreements have been resolved, the IRS computes the interest, and the refund or credit is finally ready to be issued. You will want to review the interest computations to make sure they are correct.
Tip: If you receive overpayment interest on the refund, you can look for overlapping periods of underpayment interest that you have paid or will owe with respect to other liabilities. These might provide opportunities for interest netting to reduce your overall interest liability.
How Long Does It Take?
Given all the steps in the process, from preparing the report and computations through issuance of the refund, there can be lots of variation in how long it takes, depending on factors such as the complexity of the computations, the nature of the issues, the availability of the people involved, and any questions or concerns from the JCT. Currently, cases generally take at least four to six months.
Tip: You can request expedited review in certain circumstances. You can do your part to move the case forward by providing complete, accurate, and timely information. Understanding the steps in the process helps to set realistic expectations and keep your company apprised as each step is accomplished and receipt of the refund approaches.
Marjorie Margolies is a partner at Mayer Brown LLP.