Claiming Dormant Tax Refunds Through Section 1311

Taxpayers should try to claim tax refunds within the statute of limitations. Sometimes they can’t. Taxpayers under audit, for instance, might have a contingent claim that won’t be ripe until the audit concludes. In these situations, a seasoned tax advisor will likely recommend submitting a protective claim for refund, safeguarding the statute of limitations.

That is great advice. But if it is too late to file a protective claim, there are still avenues for taxpayers to claim a refund. Section 1311, which codifies equitable recoupment under specific conditions, can be a powerful tool if applied correctly. There are typically three, sometimes four, requirements that must be met for a single taxpayer to utilize Section 1311:

1. A “determination,” as defined by Section 1313, must have been made within the pastyear,
2. That determination must fall under one of the seven categories outlined in Section 1312,
3. The refund must be otherwise unavailable, often because of an expired refund statute, and
4. For some situations, such as a double-denied deduction, the deduction must be claimed within the original statute of limitations.

These four requirements apply directly to situations like this: A business owner purchases a forklift eligible for bonus depreciation but claims it in the wrong tax year. Although he purchased the forklift in 2018 to help run his warehouse, a Schedule C business, the taxpayer waits until the 2020 tax year to claim bonus depreciation—the year he thinks the forklift was placed in service. IRS auditors reviewed his 2020 tax return in 2022 and disagreed, claiming the forklift was placed in service during 2018. They propose an adjustment to eliminate the bonus depreciation. So, what can the taxpayer do to protect his deduction?

The proposed 2020 adjustment can be resolved in the normal course of the audit, or through Tax Court—no need for a protective refund claim. A favorable ruling there would obviate the 2018 claim. Whenever possible, the contingent 2018 claim should still be addressed through a protective refund. Unfortunately, the contingent 2018 claim is dormant, hiding behind the expired refund statute of limitations, and the ongoing controversy must conclude for the taxpayer to revive it.

That is where Section 1311 may apply: it allows the taxpayer to submit a refund claim for the 2018 tax year if he loses the 2020 dispute. Under Section 1314(b), the taxpayer has one year from the “determination”—the time his 2020 deduction is disallowed, either through a Tax Court decision or a signed closing agreement under Section 7121—to try reclaiming his deduction in the 2018 tax year.

And that is just one of the seven potential adjustments under Section 1311.

While there are other administrative methods to challenge overpayments, Section 1311 provides a useful backup mechanism to ensure taxpayers are not penalized or disadvantaged simply because they did not file a claim before the outcome was finally determined.

If you have any questions on this or any other tax issue, please call me at 214-749-2459 or email me at npegelow@meadowscollier.com.