Who Is Interested in My Request for Interest?
Procedural missteps can risk taxpayers’ pursuit of overpayment interest from the IRS

by Robert C. Morris, Robert J. Kovacev, and Richard L. Hunn
July 9, 2021
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The law is clear: “If a taxpayer overpays its taxes, the IRS owes the taxpayer interest on that amount.”1 This obligation certainly characterized the Internal Revenue Service’s 2020 fiscal year, in which the IRS paid more than $3 billion of overpayment interest to taxpayers.2 This figure is just the latest in a series of increasing amounts of interest the IRS paid to taxpayers in recent years.

The IRS must pay overpayment interest in a number of situations, including refunds issued for past tax years related to refund claims (for example, foreign tax credit claims and research credit claims), refunds received after the resolution of a tax dispute (whether with Exam or Appeals or through litigation), and delays by the IRS in processing net operating loss carrybacks and other refund payments. Determining the amount of overpayment interest owed is often extremely complex, especially for corporate taxpayers when interest netting, carrybacks, offsets, and multiple tax years are involved. The IRS does not always calculate overpayment interest correctly and sometimes even fails to pay overpayment interest at all.

What should a taxpayer do if the IRS issues a tax refund with insufficient overpayment interest, or with none at all? Must the taxpayer file an administrative claim with the IRS for the missing overpayment interest? What if the IRS denies or fails to respond to an administrative claim? May the taxpayer sue? If so, in which court and under what time limitations, if any?

Procedural missteps in this area can be costly and result in losing the opportunity to pursue overpayment interest from the IRS. And far from providing clarity, recent court decisions have made the rules governing claims for stand-alone overpayment interest increasingly unclear.3 This article focuses on the practical steps that taxpayers may take to protect their rights to recover overpayment interest from the IRS.

Increasing Murkiness of Bringing Stand-Alone Overpayment Interest Claims

The authorities are split regarding the legal character of a claim for overpayment interest.

Some courts, referencing 28 U.S.C. Section 1346(a)(1), consider overpayment interest to be “any sum alleged to have been excessive . . . under the internal revenue laws.” These courts generally apply the rules governing tax disputes to stand-alone claims for overpayment interest. Other courts have determined that overpayment interest is a “general debt” of the government and therefore not governed by the Internal Revenue Code’s rules governing tax disputes. Crucial procedural questions hinge on this distinction, including 1) which statute of limitations applies when making overpayment interest claims, 2) what administrative steps, if any, a taxpayer must take to pursue such claims, and 3) which court or courts have jurisdiction to decide overpayment interest disputes.

The courts disagree on the nature of a claim for stand-alone overpayment interest. Unless the US Supreme Court resolves the various disagreements among the courts discussed below, the safest course of action for taxpayers is to position their claims for stand-alone overpayment interest both administratively and judicially so they can pursue the claim regardless of which competing position eventually prevails.

Statute of Limitations to Claim Overpayment Interest

Claims for overpayment interest are governed by either the 1) six-year statute of limitations if overpayment interest is a “general debt” of the government4 or 2) provisions governing tax disputes in the Internal Revenue Code. Determining which regime is most advantageous depends highly on the facts and circumstances of each claim. Taxpayers can sometimes proceed under both regimes but sometimes may have only one option.

If overpayment interest is a “general debt” of the government, then taxpayers have six years to file a lawsuit from the date that the cause of action or claim “first accrues,” according to 28 U.S.C. Section 2501 (“general six-year statute”). To be clear, the general six-year statute is for filing a lawsuit for overpayment interest, not for filing an administrative claim with the IRS for overpayment interest. (Administrative claims are discussed below.) A claim for overpayment interest first accrues on the date that certain IRS officials certify that the refund or credit is allowed.5

The date that a claim for overpayment interest “first accrues” may not always be apparent, especially for corporate taxpayers with carrybacks and multiple tax years in different stages of IRS administrative and judicial proceedings. For example, the IRS may schedule an overassessment of tax for an earlier tax year because of a credit carryback from a later tax year to the earlier year, even if the taxpayer did not make a formal administrative claim for refund for the earlier tax year.6 The scheduling of the overassessment by the IRS for the earlier tax year may start the clock on the general six-year statute for the overpayment interest without the taxpayer’s ever having taken affirmative action such as filing an administrative claim.

Taxpayers should use the earliest possible date of first accrual when calculating the deadline to file suit under the general six-year statute. Moreover, even taxpayers who have filed administrative claims for overpayment interest with the IRS should consider filing a lawsuit to recover the overpayment interest before the general six-year statute expires, even if the IRS has indicated that it will consider or act on the administrative claim. Otherwise, the claim may be time-barred under the general six-year statute.

That said, if claims for overpayment interest are governed by the general rules governing tax disputes, then the claim is subject to the time requirements of the Internal Revenue Code. Generally, the statute of limitations for filing a lawsuit is two years from the date the IRS formally denies the administrative claim.7 Again, the statute of limitations under the tax dispute rules may or may not be more advantageous for taxpayers than the general six-year statute.

For example, if the IRS formally denies a taxpayer’s administrative claim for overpayment interest two years after the claim first accrued, then the two-year statute of limitations for filing suit may expire four years from the date of first accrual, which is two years before it would have expired under the general six-year statute. Conversely, if the IRS fails to respond to the administrative claim or delays denying it, then the two-year statute of limitations for filing a lawsuit may extend to a date later than the expiration of the general six-year statute. This is just one of many examples where one regime may be more advantageous to a taxpayer than the other.

To avoid statute of limitations issues, taxpayers should consider preparing a timeline that starts with the earliest possible date of first accrual and ends with the final dates to file suit under both the general six-year statute and the rules governing tax disputes. This timeline also includes dates for actions such as filing an administrative claim with the IRS for the overpayment interest (discussed below) and should be updated as events occur, such as the IRS’ denial of an administrative claim. Creating this timeline will allow the taxpayer to determine the date that it must file suit before the expiration of the earlier of either the general six-year statute or the rules governing tax disputes. If a taxpayer cannot meet the earlier of the two deadlines for whatever reason, there is still ample authority that may allow a taxpayer to file a suit to recover the overpayment interest, but its jurisdictional options may be limited and the taxpayer may face a government challenge, as discussed below.

IRS Administrative Requirements for Taxpayers to Pursue Overpayment Interest

The general tax dispute rules require taxpayers to file an administrative claim with the IRS (Section 7422(a)) and then wait at least six months before filing a lawsuit to recover the amount requested in the administrative claim, unless the IRS denies the administrative claim (Section 6532(a)). Given the disagreement among the courts regarding the legal characterization of overpayment interest, it is no surprise that they also disagree about which IRS administrative requirements, if any, a taxpayer must satisfy.

First, the courts that characterize overpayment interest as a general debt of the government do not require taxpayers to satisfy the administrative requirements contained in the Internal Revenue Code for general tax disputes.8 This means that the taxpayer is not required to file an administrative claim for the overpayment interest with the IRS before filing its lawsuit.

Second, some courts that have applied the tax dispute rules to claims for overpayment interest have determined that those claims “are subject to the jurisdictional prerequisite of an administrative claim under Internal Revenue Code [Section] 7422.”9 However, at least one court has suggested that taxpayers filing a lawsuit under the tax dispute rules may not be required to file an administrative claim with the IRS for the overpayment interest before filing a suit because of the differences in functions and meanings in Section 7422 and the “any sum” provision of 28 U.S.C. Section 1346(a)(1), as discussed below.10

To avoid this quagmire, taxpayers should consider filing an administrative claim with the IRS for the overpayment interest and waiting for six months to pass before filing suit if the timeline allows. This approach ensures that the taxpayer has satisfied the jurisdictional requirements for filing suit under both lines of authority if it is later determined that the administrative requirements of the general tax dispute rules apply to claims for overpayment interest.

Where Do Taxpayers Sue to Recover Overpayment Interest?

The courts are also in irreconcilable conflict as to whether jurisdiction over disputes that involve stand-alone claims for overpayment interest lies solely in the district courts, the Court of Federal Claims, or both. Although it is well settled that both the district courts and the claims court have jurisdiction to decide cases involving overpayment interest claims if the IRS refuses to refund a tax overpayment and pay overpayment interest on that tax refund,11 things are far less clear when the taxpayer’s claim involves only overpayment interest. The dispute hinges on the language of 28 U.S.C. Section 1346(a)(1), which governs jurisdiction for “any sum alleged to have been excessive . . . under the internal revenue laws.” If overpayment interest is a “sum alleged to have been excessive . . . under the internal revenue laws,” both the district court and claims court have jurisdiction over the claim. If not, then the claim is simply a money claim against the federal government governed by the Tucker Act, 28 U.S.C. Section 1491(a) (hereafter the Tucker Act), and only the Court of Federal Claims has jurisdiction.

A number of courts have held that stand-alone overpayment interest claims are plainly claims for a “sum alleged to have been excessive under the internal revenue laws,”12 and the IRS’ refusal to pay a taxpayer overpayment interest results in the IRS withholding an excessive sum under the internal revenue laws. In other words, “[i]f the Government does not compensate the taxpayer for the time-value of the tax overpayment, the Government has retained more money than it is due, i.e., an ‘excessive sum.’”13 Advocates for this line of thinking argue that “[i]f district courts have unchallenged jurisdiction over suits for refunds, incident to which awards of interest are made, it is illogical to argue there is no jurisdiction over suits to recover only interest incident to the refund.”14

Other courts disagree with that analysis. These courts conclude that overpayment interest is not “any sum” under 28 U.S.C. Section 1346(a)(1), because the words “any sum” refer only to amounts that were previously paid to, or collected by, the IRS.15 Because stand-alone claims for overpayment interest do not necessarily involve amounts the taxpayer previously paid to the IRS and for which the taxpayer now seeks a refund, these courts find that 28 U.S.C. Section 1346(a)(1) does not apply. Therefore, this line of authority holds that the Court of Federal Claims has exclusive jurisdiction for overpayment interest suits under the Tucker Act, because it is a “straightforward claim against the federal government.”16

As of this writing, the split among the courts is deeper than ever, with multiple decisions offering competing analyses over the last few years. Although there may be more cases that have found that overpayment interest is a “sum alleged to have been excessive . . . under the internal revenue laws,” three recent circuit opinions have found that suits for overpayment interest exceeding $10,000 belong only in the Court of Federal Claims under the Tucker Act.17 Unless the Supreme Court resolves this jurisdictional dispute, the path of least resistance for taxpayers may be to file suit in the Court of Federal Claims and plead jurisdiction under both 28 U.S.C. Section 1346(a)(1) and the Tucker Act if sufficient time remains under both the tax statutes and the general six-year statute to do so. This path may help the taxpayer to avoid a jurisdictional fight with the government and offer some protection if the Supreme Court later resolves the jurisdictional dispute while the taxpayer’s case is still pending. However, if for some reason the taxpayer does not or cannot select this option, there is certainly sufficient basis to support taxpayers asserting claims for overpayment interest in either forum.

Conclusion

Recent court decisions have rendered the path for pursuing stand-alone claims for overpayment interest against the IRS somewhat murky. However, taxpayers can follow certain best practices to protect their rights to seek overpayment interest from the IRS. These are to: 1) prepare a timeline that starts with the earliest possible date of first accrual and that ends with the last day(s) to file suit under both the general six-year statute and the rules governing tax disputes; 2) file an administrative claim with the IRS for the overpayment interest; 3) update the timeline as actions occur, such as the IRS’ denial of the administrative claim; and 4) file a lawsuit in the Court of Federal Claims before the expiration of the earlier of either the general six-year statute or rules governing tax disputes and plead jurisdiction under both 28 U.S.C. Section 1346(a)(1) and the Tucker Act. Taxpayers who follow these guidelines should be well positioned to pursue their claims for overpayment interest and defend against any administrative or jurisdictional challenges the IRS may make. Moreover, the courts have provided taxpayers with multiple avenues to pursue claims for overpayment interest against the IRS even if the taxpayer’s path falls outside of these guiding lights.

Robert C. Morris is the co-head of tax, United States, Robert J. Kovacev is a partner, and Richard L. Hunn is senior counsel at Norton Rose Fulbright.

Endnotes

  1. Energy E. Corp. v. United States, 645 F.3d 1358, 1359 (Fed. Cir. 2011). Furthermore, Section 6611 provides that the IRS must pay taxpayers interest on overpayments with respect to any internal revenue tax at the prescribed overpayment rate. Overpayment interest is calculated from the date of overpayment to a date determined by the IRS, but no more than thirty days before the refund is tendered to the taxpayer.
  2. “Tax Filing: Actions Needed to Address Processing Delays and Risks to the 2021 Filing Season,” Government Accountability Office, March 2021, gao.gov/assets/gao-21-251.pdf.
  3. Although this article references a number of cases decided in this area, in the interest of brevity the authors omit numerous citations to similar cases following the same reasoning and/or reaching the same conclusion as the cited cases.
  4. “Every civil action commenced against the United States shall be barred unless the complaint is filed within six years after the right of action first accrues,” according to 28 U.S.C. Sections 2401 and 2501 for Claims Court, which both require that a suit be filed “within six years after such claim first accrues.”
  5. This is generally done on IRS Form 2188 (Voucher and Schedule of Overpayment and Overassessment) or on an “equivalent” form. See also Paresky v. United States, 139 Fed. Cl. 196 (2018); Barnes v. United States, 137 F. Supp. 716, 48 AFTR 1212 (Ct. Cl. 1956) (citing the predecessor to Section 6407). See also Section 6407 and Treasury Regulation 301.6407-1; Coca-Cola Co. v. United States, 87 Fed. Cl. 253, 103 AFTR 2d 2009-2513, 2515 (2009); and Paresky, 122 AFTR 2d 2018-5438 at 5445 (Fed. Cl. 2018) (citing and quoting Coca-Cola).
  6. Claims for overpayment interest are often made on Form 843 (Claim for Refund and Request for Abatement).
  7. See Section 6532(a). As discussed later in the article, this assumes that taxpayers must file an administrative claim for overpayment interest under Section 7422(a) if proceeding under the tax dispute rules.
  8. For example, General Electric Co. v. United States, 384 F.3d 1037 (Fed. Cir. 2004); Lyons v. United States, 71 AFTR 2d 93-551 (SD Iowa 1992).
  9. Wichita Ctr. for Graduate Med. Educ., Inc. v. United States, 118 AFTR 2d 2016-6994 (D. Kan. 2016); Paresky v. United States, 124 AFTR 2d 2019-5756 (SD Fl. 2019) (magistrate opinion), rev’d, by district court, 2019 US Dist. LEXIS 236476 (SD Fl. 2019), aff’d, 2021 US App. LEXIS 12887 (11th Cir. 2021); Amoco Prod. Co. v. United States, 1988 US Dist. LEXIS 954 (ND Ill. 1988) (if the district court is the proper forum for an overpayment interest dispute, the taxpayer must timely file an administrative claim with the IRS as a prerequisite).
  10. W. Scripps Co. & Subsidiaries v. United States, 420 F.3d 589 (6th Cir. 2005) (noting that the IRS administrative claim requirements may not apply to claims for overpayment interest); but see concurring opinion in Pfizer v. United States, 939 F.3d 173, 182 (2d Cir. 2019) (noting in dicta that “even if the District Court had jurisdiction in this case, Pfizer cannot have it both ways by exploiting the jurisdiction of the district court under [Section] 1346(a) without meeting the two-year statute of limitations applicable to that provision”).
  11. For example, Pfizer v. United States, 939 F.3d 173, 179 (2d Cir. 2019); W. Scripps Co. & Subsidiaries v. United States, 420 F.3d 589, 592–593 (6th Cir. 2005).
  12. For example, W. Scripps Co. & Subsidiaries v. United States, 420 F.3d 589 (6th Cir. 2005), Ford Motor Co. v. United States, 768 F.3d 580 (6th Cir. 2014); Wichita Ctr. for Graduate Med. Educ., Inc. v. United States, 2016 US Dist. LEXIS 97639 (D. Kan. 2016); Pfizer Inc. v. United States, 2016 US Dist. LEXIS 153241 (SDNY 2016) rev’d 939 F.3d 173 (2d Cir. 2019); Triangle Corp. v. United States, 592 F. Supp. 1316 (D. Conn. 1984), abrogated by Pfizer v. United States, 939 F.3d 173 (2d Cir. 2019); Bank of America Corp. v. United States, 2019 US Dist LEXIS 109238 (WDNC 2019), rev’d 964 F.3d 1099 (Fed. Cir. 2020); Paresky v. United States, 124 AFTR 2d 2019-5756 (SD Fl. 2019) (magistrate opinion), rev’d by district court, 2019 US Dist. LEXIS 236476 (SD Fl. 2019), aff’d, 2021 US App. LEXIS 12887 (11th Cir. 2021).
  13. Scripps, at 597.
  14. For example, Triangle Corp. v. United States, 592 F. Supp. 1316, 1318 (D. Conn. 1984), abrogated by Pfizer v. United States, 939 F.3d 173 (2d Cir. 2019).
  15. Bank of America Corporation v. United States, 964 F. 3d 1099 (Fed. Cir. 2020); Pfizer v. United States, 939 F.3d 173 (2d Cir. 2019); Paresky v. United States, 2021 US App. LEXIS (11th Cir. 2021).
  16. Pfizer v. United States, 939 F.3d at 179.
  17. Those cases are Pfizer (2019), Bank of America (2020), and Paresky (2021).

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