Considerations in Tax Refund Litigation
Is refund litigation the path to releasing “stuck” refunds?

by Lee Meyercord and Mary A. McNulty
March 6, 2026
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The Internal Revenue Service has seen unprecedented changes this year. Approximately 25,000 IRS employees—or twenty-five percent of its workforce—have accepted the deferred resignation or retired or were laid off.1 When we wrote this article in November, the federal government had been shut down for more than four weeks with only the glimmer of an end in sight. Although the shutdown ended November 12, these significant disruptions at the IRS undoubtedly compromised taxpayer service and may have reminded taxpayers of the COVID-19 pandemic days, when the IRS failed to respond to taxpayer questions, frequently lost refund claims, and had truckloads of unopened mail.2 Refunds have already been delayed, and taxpayers are struggling to navigate the disorder at the IRS.

The three most common issues that taxpayers face with expected refunds are significant delays in processing, incorrect application of the statute of limitations—particularly in the context of a net operating loss (NOL) carryback—and inconsistent and confusing communications from the IRS. These frustrating experiences have led more taxpayers to wonder how to free a “stuck” refund and whether refund litigation is the answer. This article explores key strategies in planning tax refund litigation, including filing a timely refund claim, navigating the statute of limitations, and evaluating potential offsets and choice of forum.

Filing the Refund Claim: The Ticket to Court

Before taxpayers can file suit, they first must have a valid refund claim, achieving which can be harder than taxpayers expect.3 The refund claim must be filed within the applicable statute of limitations. Refund claims must generally be filed within three years from the time the return was filed or two years from the time the tax was paid, whichever is later.4 If a refund claim is filed within the two-year period, the refund is limited to the tax paid in that period.5 This can be a surprisingly complex analysis for large corporate taxpayers to ensure that refund claims filed after payments on a notice of deficiency will not be limited.6 If taxpayers’ refund claims are contingent on some future event, taxpayers can file a protective claim for refund to preserve their rights.7

In addition to being timely, the refund claim must also satisfy the procedural requirements in the regulations for a formal claim for refund.8 The claim must be filed on the correct form, signed under penalties of perjury, and set forth “in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.”9 There must be a separate refund claim for each type of tax and each tax year.10

Informal Claims for Refund

If a taxpayer files a refund claim that does not comply with these requirements, it may be considered an “informal” claim for refund.11 A taxpayer may perfect an informal claim by filing a formal claim for refund, even after the statute of limitations has expired, as long as the informal claim has not been disallowed.12 The taxpayer must file a formal refund claim before filing suit.13 A note of caution
—an application for a tentative refund (that is, a “quickie refund”) is not a formal refund claim.14 Therefore, in addition to filing Form 1045 for individual taxpayers and Form 1139 for corporate taxpayers, taxpayers must file a formal refund claim on the correct form (1040X for individuals and 1120X for corporations) for the carryback year before the statute expires.

Variance Doctrine

Under Treasury Regulations Section 301.6402-2(b)(1), a refund “claim must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof.” If suit is filed on a ground that varies from the grounds set forth in a refund, courts will not grant the refund15 and even may not exercise jurisdiction over the suit.16 The rationale of the variance doctrine is to give the IRS adequate notice of the taxpayer’s claims and the opportunity to correct errors and limit the scope of issues at trial.17 A variance may take the form of a new legal theory or a variance from the facts asserted in the refund claim.18 However, the doctrine is not absolute. Courts may permit the taxpayer to make arguments not explicitly stated in the claim if they are sufficiently related to the grounds asserted, or if the IRS was otherwise put on notice of the factual or legal basis for the argument.19 The US Supreme Court has long allowed taxpayers to bring a refund suit after the IRS has considered technically deficient refund claims on their merits.20

The variance doctrine has been applied recently, with some harsh results. For example, in Trail King Industries, Inc. v. United States, the taxpayer did not challenge the validity of a regulation in its refund claim because the refund claim was filed prior to Loper Bright—the Supreme Court case that overturned Chevron deference.21 When the taxpayer argued in its refund suit that the regulation was invalid, the government successfully argued in a motion to dismiss that the variance doctrine barred the taxpayer’s argument.

This creates a trap for the taxpayer. A taxpayer may omit an argument about the validity of a regulation from its refund claim because IRS Appeals cannot consider the argument.22 However, this omission would preclude the taxpayer from raising the argument in litigation because it was not included in the taxpayer’s refund claim. Therefore, taxpayers should carefully evaluate a refund claim and determine whether additional or alternative arguments for the refund should be included, regardless of whether they are likely to persuade the IRS Exam team or Appeals officer. The claim should be periodically reviewed to determine if there are new arguments based on recently decided cases, particularly concerning novel and evolving issues, and amended or supplemented if necessary.

Drafting refund claims is an art. They should articulate all potential grounds for recovery and provide enough detail to alert the IRS to the nature of the dispute but not be so specific as to risk foreclosing alternative theories. The variance doctrine underscores the importance of thorough preparation at the administrative stage, because omissions or ambiguities can have lasting consequences in subsequent litigation.

Filing Suit: Statute of Limitations Traps

After filing a refund claim, the taxpayer must wait six months before filing suit. If the IRS formally disallows the refund claim, the taxpayer has two years from the notice of disallowance to file suit.23 Taxpayers should monitor all relevant deadlines and maintain a clear record of communications with the IRS. If the taxpayer receives a notice of deficiency sent by certified mail that disallows a refund claim made during audit, the risk arises that the notice of deficiency could be considered a formal notice of disallowance that starts the two-year clock for filing suit. In such cases, the taxpayer can request that the IRS enter into a Form 907 agreement (Agreement to Extend the Time to Bring Suit) to extend the window to file suit, with a clear deadline. Form 907 also allows the taxpayer sufficient time to resolve issues in IRS Appeals before filing suit to narrow the scope of litigation.24

It’s common—particularly now given the staffing shortages at the IRS—for the IRS not to respond to a taxpayer’s refund claim. Although IRS suggests the statute therefore remain open indefinitely,25 practitioners generally exercise caution and file suit before the six-year general statute of limitations for claims against the United States expires.26

Practitioners must vigilantly track relevant dates and ensure the filing of refund claims and any refund suit in the correct time period. Failure to comply with the statute of limitations is a common pitfall that can result in the forfeiture of substantial refund rights.

Strategic Considerations in Filing Suit

When deciding whether to file suit on a tax refund claim, taxpayers should weigh several strategic considerations, including:

  • the strength of the claim;
  • the likelihood of administrative resolution;
  • litigation costs;
  • potential offsets, which increase complexity and risk; and
  • publicity.

When the IRS erroneously denies a refund claim because it misapplies the statute of limitations or makes other clear errors, filing suit may be a good option. However, we recommend that taxpayers first request the assistance of the IRS’s Taxpayer Advocate Service to resolve these types of mistakes in a cost-effective manner. But due to the recent cuts at the Taxpayer Advocate Service, filing suit may be a taxpayer’s only choice 27 For these types of issues, taxpayers should be able to resolve them cost effectively with the US Department of Justice, too.

A taxpayer should also consider filing suit when it has a strong case that is unlikely to be resolved administratively—a situation that might arise because, for example, Exam and Appeals will not consider challenges to a regulation or the IRS has designated the case for litigation.

However, litigation has its downsides. It is expensive in terms of costs and company resources. Responding to discovery and supervising litigation can be time consuming. The government may raise offsets or affirmative defenses, discussed in more detail below, which will broaden the scope of litigation and increase litigation costs.

In addition, litigation results in publicity: the fact of the lawsuit, and likely many of the filings, will be public. With the presumption of open courts, the government strongly disfavors sealing records.28 That said, some records may be kept confidential if a party demonstrates that specific and compelling interests outweigh the public’s presumptive right of access to judicial documents.29 To prevail, the moving party generally must show good cause, such as the need to protect confidential business data, trade secrets, or sensitive personal information.30

The Role of Offsets in Refund Claims

Offsets are a critical consideration in tax refund litigation, because they may impact how much a taxpayer ultimately recovers. When a taxpayer seeks a refund, the government may assert offsets for other outstanding tax liabilities, debts owed to federal agencies, or statutory credits that reduce the net refund due. The authority to apply offsets is grounded in both statutory provisions and administrative practice, allowing the IRS or the Department of Justice to ensure that taxpayers do not receive refunds to which they are not entitled after accounting for all obligations.31 Taxpayers may, however, raise counter-offsets to the government’s offsets.32

Before filing suit, taxpayers should consider whether the government may successfully assert any offsets. The timing of offset assertions can vary, but courts generally permit the government to raise them late in litigation, provided the taxpayer has an opportunity to contest the validity and amount.33 A taxpayer may raise counter-offsets without first filing a refund claim.34

Offsets can substantially impact recoverable amounts, particularly in cases involving multiple tax periods, cross-liabilities, or contested debts. Understanding the procedural requirements for asserting and challenging offsets is essential to maximizing recovery and avoiding unexpected reductions in the amount awarded.

Jurisdictional Choices: Choice of Forum

Taxpayers may file refund suits in either the US district court for the appropriate district or the US Court of Federal Claims.35 The choice of forum can affect procedural rules, discovery options, and appellate review. District courts, but not the Court of Federal Claims, offer the possibility of a jury trial.36 Jury trials for partnership cases may be limited. Geographic convenience, judicial expertise, and circuit precedent inform the taxpayer’s choice of forum.

Planning for Success

Tax refund litigation demands rigorous attention to procedural requirements, strategic planning, and comprehensive factual development. Best practices include early evidence gathering, careful drafting of refund claims to preserve all viable arguments, tracking of all statutory deadlines, and an ongoing review of relevant case law and IRS guidance. Anticipating government defenses—such as offsets, procedural challenges, or factual disputes—is vital to framing the litigation strategy. A well-prepared case, with thorough factual development and clear legal arguments, maximizes the likelihood of a favorable outcome.

Lee Meyercord and Mary A. McNulty are partners at Holland & Knight’s Dallas office.

Endnotes

  1. Treasury Inspector General for Tax Administration, Snapshot Report: IRS Workforce Reductions as of May 2025, Report Number 2025-IE-R027.
  2. Millions of Paper Tax Returns Go Unopened at Short-staffed IRS, May 29, 2020, www.politico.com/news/2020/05/29/paper-tax-returns-irs-290112.
  3. Internal Revenue Code (I.R.C.) Sections 6511; 7422.
  4. I.R.C. Section 6511(a). Special rules apply to claims involving bad debts, worthless securities, and certain foreign tax credits, which may allow for a longer filing window.
  5. I.R.C. Section 6511(a)(2)(B).
  6. Frequently, large taxpayers file multiple refund claims at different times, which may be subject to different limitations periods and different limitations on amount. It’s important to track the statute and any limitations amount.
  7. United States v. Kales, 314 U.S. 186, 196 (1941).
  8. Treas. Reg. Section 301.6402-2.
  9. Id. Section 301.6402-2(a)(2), (b)(1),(c), (d). Income tax refund claims are filed on Form 1040X for individuals and Form 1120X for corporations, and interest and penalty refund claims are filed on Form 843.
  10. Id.
  11. See, for example, American Radiator & Standard Sanitary Corp. v. United States, 162 Ct. Cl. 106, 117 (1963) (court allowed late formal claims filed before IRS rejected timely filed informal claims that put IRS on notice of nature of taxpayer’s claim).
  12. Courts hold that an informal claim may not be perfected if it has been informally disallowed. Stelco Holding Co. v. United States, 42 Fed. Cl. 101, 114-15 (1998).
  13. BNSF Railway Co. v. United States, 775 F.3d 743, 757-58 (5th Cir. 2015) (Fifth Circuit recognized that informal claims could be perfected by late-filed formal claims, but the taxpayer’s failure to perfect the informal claims before filing suit required their dismissal).
  14. Treas. Reg. Sections 5.6411- 1(f), 1.6411-3(c). Courts consistently hold that Forms 1045 and 1139 do not constitute formal or informal refund claims. See, for example, Kirsh v. United States, 258 F.3d 131 (2d Cir. 2001); Crismon v. United States, 550 F.2d 1205, 1206 (9th Cir. 1977).
  15. See Angelus Milling Co. v. Commissioner, 325 U.S. 293, 295–99 (1945); United States v. Felt & Tarrant Manufacturing Co., 283 U.S. 269, 272-73 (1931).
  16. Shleifer v. United States, 135 AFTR 2d 2025-1841 (S.D. Fl.), appeal pending, Eleventh Circuit No. 25-12719.
  17. Thompson v. United States, 332 F.2d 657, 660 (5th Cir. 1964); see also Alabama By-Products Corp. v. Patterson, 258 F.2d 892, 900 (5th Cir. 1958) (stating the purpose of the variance requirement is to “apprise the Commissioner of what to look into”).
  18. Cook v. United States, 599 F.2d 400 (Ct. Cl. 1979).
  19. Brown v. United States, 427 F.2d 57 (9th Cir. 1970) (finding variance doctrine did not bar a response to a new argument from the government).
  20. Angelus Milling Co. v. Commissioner, 325 U.S. 293, 297 (1945); United States v. Memphis Cotton Oil Co., 288 U.S. 62, 71 (1933).
  21. No. 4:24-cv-04164 (D.S.D. August 4, 2025).
  22. Treas. Reg. Section 301.7803-2(c)(19).
  23. I.R.C. Section 6532(a)(1).
  24. I.R.C. Section 6532(a)(2).
  25. Rev. Rul. 56-381, 1956-2 C.B. 953 (Form 907 extending two-year period for filing suit is not necessary when two-year period never commenced because the IRS did not send valid notice of disallowance); CCA 201044006 (November 5, 2010) (stating position of Office of Chief Counsel that six-year statute “does not apply in situations where a taxpayer has filed a timely claim for refund and the Service has not issued a valid notice of claim disallowance”); NSAR 011019 (March 25, 1999) (when IRS does not issue a notice of disallowance, the period for filing suit is indefinite).
  26. 28 U.S.C. Section 2401(a).
  27. Based on reports from earlier this year, the Taxpayer Advocate Service lost approximately 400 employees, which is a reduction of about twenty percent. Erin Schilling, “IRS Taxpayer Advocate Service Struggles as 400 Workers Depart,” Bloomberg Tax (May 21, 2025), https://news.bloombergtax.com/daily-tax-report/irs-taxpayer-advocate-service-struggles-as-400-
    workers-depart.
  28. Schmidt v. IRS, 533 F. Supp. 3d 952, 954 (2020).
  29. Id.
  30. Id. at 954-55.
  31. I.R.C. Section 6402(a) (authorizing offsets); Lewis v. Reynolds, 284 U.S. 281 (1932).
  32. Union Pac. R.R. v. United States, 389 F.2d 437 (Ct. Cl. 1968). Like the government’s offset, a taxpayer’s counter-offset must arise from both the same taxable year and the same tax on which the refund is based. The sole purpose of a taxpayer’s counter-offset is to reduce the amount of government offsets. Thus, counter-offsets cannot increase the amount of the refund. In general, the taxpayer has the burden of proving any counter-offset issues. Missouri Pac. R.R., 338 F.2d 668 (Ct. Cl. 1964).
  33. See, for example, IES Industries, Inc. v. United States, 349 F.3d 574 (8th Cir. 2003) (offset allowed following United States loss on appeal, when defense became an issue); Americold Corp. v. United States, 28 Fed. Cl. 747, 750, 755 (1993) (offset raised sixteen months after settlement negotiated was ruled timely, because minimal additional discovery was required); Southeast Bank v. United States, 2 Cl. Ct. 530, 532-33 (1983) (offset raised on remand during computations was ruled timely). But see Mayo Clinic v. United States, 131 A.F.T.R.2d 2023-1127 (D. Minn.) (not allowing judgment to be amended for hypothetical offset under Section 6402(a)), aff’d on other grounds, 136 AFTR 2d 2025-5282 (8th Cir.); Buder v. United States, 7 F.3d 1382, 1386–87 (8th Cir. 1993) (offset raised in trial brief for the first time ten days before trial was ruled untimely).
  34. Union Pac. R.R. v. United States, 389 F.2d 437 (Ct. Cl. 1968).
  35. 28 U.S.C. Section 1346(a)(1) (“The district courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims of any civil action against the United States for the recovery of any internal-revenue tax alleged to have been erroneously or illegally assessed or collected, or any penalty claimed to have been collected without authority or any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws”).
  36. 28 U.S.C. Sections 1346(e), 1508.