Case — Application of Overpayment

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TL Case Summ

THE QUESTION

Does the IRS have to apply an overpayment in accordance with a taxpayer’s request?

THE DISPUTE

Taxpayer Says: Overpaid taxes should be allocated as specifically requested.

Internal Revenue Service Says: The Internal Revenue Code explicitly gives the IRS the authority to allocate refunds to any tax liability.

THE LAW

From Internal Revenue Code Section 6402(a): Allows the IRS to credit an “overpayment, including any interest allowed thereon, against any liability in respect of an internal revenue tax on the part of the person who made the overpayment” and, subject to certain limitations, refund any balance to the person.

From Wood v. United States, 808 F.2d 411, 416 (5th Cir. 1987): When a taxpayer owing more than one tax or owing tax for more than 1 year makes voluntary payments to the IRS, he or she may, by specific written directions, assign the application of those payments to any portion of the liability.

From United States v. Ryan, 64 F.3d 1516, 1522 (11th Cir. 1995): Under the voluntary payment rule, when a taxpayer who has outstanding tax liabilities voluntarily makes a payment, the IRS usually will honor the taxpayer’s request as to how to apply that payment.

THE CAUSE OF THE DISPUTE

Generally, when you make a payment of your tax liability and designate how the liability should be credited at the time the payment is made, the IRS will honor your request. This is called the ‘voluntary payment rule’.

The dispute in this case stems from the question of whether the voluntary payment rule applies to overpayments.

The taxpayer filed Chapter 7 bankruptcy in December 2003. The taxpayer had outstanding tax liabilities from the 1997 and 2000 tax years. The 1997 liability was discharged in the bankruptcy, but the 2000 liability was not.

In June 2004, the taxpayer filed an individual income tax return for 2003 that showed an overpayment of tax, and requested that the overpayment be applied to the balance due for 2000. Instead, the IRS applied the overpayment to the 1997 tax liability outstanding prior to the time the bankruptcy petition was filed (based on the number of days that had passed in 2003 before the taxpayer filed for bankruptcy).

The taxpayer says the IRS improperly allocated the 2003 overpayment by overlooking the specific request to apply the overpayment to 2000.

The IRS says a taxpayer’s right to designate the application of a voluntary payment does not extend to an overpayment reported on a return.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 13KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. Application of the pre-bankruptcy portion of the 2003 overpayment to the 1997 tax liability falls within the authority to credit overpayments to any liability for any tax year and, therefore, was proper.