Refund claim, filed by a Ponzi scheme victim, was modification of earlier one and therefore not untimely

In Chief Counsel Advice (CCA) 201216033, IRS has concluded that a Form 843 (Claim for Refund and Request for Abatement) filed by a Ponzi scheme victim was a permissible amendment to her timely filed Form 1040X rather than a new, untimely claim for refund for tax year 2003.

Background.Code Sec. 6402 authorizes IRS to make credits or refunds. Refunds may not be allowed or made after the expiration of the properly applicable statutory period of limitation unless, before the expiration of such period, a claim for the refund has been filed by the taxpayer. (Reg. § 301.6402-2(a)(1))

Under Code Sec. 6511(a), a claim for credit or refund of an overpayment must be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever period expires later. No credit or refund is allowed if a claim is not filed within these time limits. (Code Sec. 6511(b))

Facts. Beginning in 2003 and continuing until sometime in early 2006, a taxpayer, invested a sum of money with a businessman. For tax year 2003, she received a Form 1099-INT, reporting interest income, and reported it on her 2003 Form 1040 filed on Apr. 15, 2004.

In 2006, Terry learned the businessman had been embezzling funds and the investment was a Ponzi scheme. She filed Form 1040X for 2003, eliminating the interest income, as she had never actually received any interest income. As a result, she timely claimed a refund for 2003.

After Terry recovered a portion of the amount she invested, she claimed the remaining amount as a theft loss on Form 1040 for tax year 2006.

IRS disallowed the refund for 2003, explaining in Letter 906 that any loss arising from theft is treated as sustained in the year in which the taxpayer discovers the loss.

Subsequently, more than three years after she filed her 2003 return, Terry filed Form 843 for tax year 2003, again requesting a refund for that year on the theory that the interest income originally reported was fictitious and the money she actually received was a return of capital. Time passed and she contacted IRS to ascertain the status of the Form 843. IRS responded that it was still doing research. She never heard anything further from IRS.

Claim was an amendment. The CCA observed that Terry's Form 843 for tax year 2003 did not require investigation of new matters. The Form 843 and the Form 1040X claimed the same basis for a refund-that she had zero interest income rather than the interest income initially reported on her Form 1040. The facts upon which the Form 843 was based would have been ascertained by IRS in determining the merits of the Form 1040X if IRS had evaluated the precise grounds in the Form 1040X rather than concluding that Terry was trying to recoup her entire loss from the investment scheme.

In addition, although IRS acted on the Form 1040X by issuing a notice of claim disallowance for 2003, that was not "final action" because IRS overlooked the grounds stated in the Form 1040X. Terry was not seeking to claim the amount of her loss from the investment scheme when she filed Form 1040X. Rather, she was seeking a refund as a result of improperly including a fictitious amount of interest income on her original return for tax year 2003. Consequently, Terry's Form 843 should be viewed as a permissible amendment to the timely filed Form 1040X, and therefore her refund for tax year 2003 is not time-barred.