Decision in federal tax refund lawsuit may prompt IRS reforms

On Behalf of | Jul 18, 2016 | Tax Controversies

Tax controversies that go to trial may result in favorable precedents, possibly even impacting IRS procedures. In a recent example, commentators question whether a federal tax refund lawsuit brought by Wells Fargo & Co. may spur other refund claim filings and/or reforms. The dispute involved the application of underpayments and overpayments from a business unit that Wells Fargo had acquired by merger.

As background, corporations pay a variety of federal taxes, such as excise takes, employment and taxes on their earnings. Although the same corporate taxpayer is involved, each type of tax is treated separately. Consequently, an underpayment in one of those tax areas might result in the company owing the IRS additional money, plus interest. At the same time, the IRS is obligated to return any overpayments in any of those tax categories made by the company, also with interest. Ironically, a single corporation could both owe money to the IRS and be due an IRS refund for the same tax period, but for different types of taxes.

If that sounds inefficient, Congressional lawmakers agree. They passed legislation in 1998 that authorized a process called interest netting. The process allows a company to get a wash, or an effective interest rate of zero, if it has overpaid in one tax area but underpaid in another. Said another way, a company may be able to equalize the interest rates on each side of the fence.

Yet what happens if a company merges with another, and the newly acquired unit had overpaid and is due money from the IRS? The instant lawsuit ruled that the post-merger company can be considered a single taxpayer, and hence utilize any overpayments involving the newly acquired unit. However, there may be a time limit regarding the acquired entity’s corporate tax history, limiting the post-merger company from going back to remote tax years.

Source: Bloomberg, “Wells Fargo’s Partial Tax Victory May Spur Billions in Refunds,” Lynnley Browning, July 6, 2016