Generally, you have up to a certain amount of time to claim a refund of federal income taxes. You must file a claim for refund within 3 years of the actual filing date of the tax return or within 2 years of the actual tax payment, whichever is later. After the statute of limitations expires, you could no longer claim a refund.
But there may be cases when you need to extend the period for claiming a refund. As pointed out by John R. Dundon II, E.A., the right to claim a refund may depend on future events, such as the result of a contingency or litigation that may not be resolved within the period covered by the statute of limitations. In this case, taxpayers can file a protective refund claim to extend the period.
A protective refund claim could take the form of an amended return – for example, Form 1040X for individuals or Form 1120X for corporations. The protective claim does not have to indicate a certain amount for the refund. But it must be in writing and signed, and must include the taxpayer’s name, address and taxpayer ID number, the specific nature of the claim and the contingencies that affect it, and the year for which the refund could be claimed.
An example in which a protective claim for refund may be necessary is for FICA (social security and Medicare) taxes withheld on severance pay. The IRS has held that severance pay is subject to FICA tax withholding. But as indicated on the website of the law firm McDermott, Will & Emery, in a case involving Quality Stores, the U.S. Court of Appeals for the Sixth Circuit ruled that severance pay is not subject to FICA tax. This is in conflict with other court rulings and the case is being reviewed by the U.S. Supreme Court.
If you received severance pay in a prior year and FICA tax was withheld, depending on the Supreme Court decision, you may eventually be entitled to a refund. In order to claim that refund, and depending on when the issue is ultimately resolved, you may need to have a protective claim for refund on file.
Employers, who could also be entitled to a refund of their portion of the FICA tax, can file a protective claim on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
As indicated by Stephan Fishman, J.D. in an article on the Nolo website, if it is determined that severance pay is not subject to FICA taxes and those taxes are refunded to employers, the employer must refund the portion of the FICA tax withheld to the affected employees. Employees who have had FICA taxes withheld from severance pay should ask their employers if they have filed a claim for refund. If not, an employee can file his or her own claim using IRS Form 843, Claim for Refund and Request for Abatement.
Deadline Looms for Quality Stores FICA Refund Claims for Severance Payments, McDermott, Will & Emery
Stephan Fishman, J.D., Court Rules Severance Pay Not Subject to FICA, Nolo
Protective Tax Refund Claim, John R. Dundon II, E.A.
Form 843, Claim for Refund and Request for Abatement, IRS