Taxing Lessons Case Summaries

Decisions — Where’s your refund?

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Image source: By U.S. National Archives and Records Administration, Public domain, via Wikimedia Commons
Image source: By U.S. National Archives and Records Administration, Public domain, via Wikimedia Commons

Where’s your refund? Possibly helping to reduce the federal budget deficit, if you failed to file a return to get an overpayment back within the applicable time period. That’s because the government gets to keep your money when you don’t claim it. The general rule for claiming a refund is that you have three years from the time you file a return or two years from when you paid the tax, whichever is later. If you don’t file a return, you have two years from the time the tax was paid to get your money. (See internal revenue code section 6511.)

If you file the refund claim within the applicable statute of limitations, you have to clear another hurdle: there’s also a statute of limitations on the amount you can have refunded. That general rule is you’ll get back the tax you paid within three years of the date you make your claim (plus any extension), or the tax you paid within two years of the date you make your claim.

One more wrinkle to note: In addition to the question of “when” you filed a return, the “when” you paid the tax can depend on the way you paid. For example, withholding from wages and estimated tax payments are generally considered paid on the due date of the return (April 15 if you’re a calendar year taxpayer).

In Summary Opinion 2016-25 (McAuliffe), the taxpayer, a former judge, overpaid his tax liability for 2003. He earned $80,000 during the year, including wages of $76,553. He paid no income tax other than the withholding on his wages in the amount of $12,156.

He was arrested in 2003 and found guilty of offenses related to trying to get insurance proceeds after burning down his home. As a result, he was disbarred and, in February 2004, sentenced to 15 years in prison.

The taxpayer had no involvement in his taxes after his arrest in 2003. He did not prepare nor sign a tax return for 2003. Instead, he let his “attorney-in-fact” and a seasonal tax return preparer handle his return. The attorney-in-fact provided the taxpayer’s 2003 information to the return preparer, who filed an extension.

The IRS had no records of a return being filed for 2003, but did have a record of an extension request filed and granted through August 15, 2004. In 2007, the IRS prepared a substitute for return for the taxpayer, and on May 5, 2008, the IRS sent a notice of deficiency based on the substitute for return to the prison where the taxpayer was serving his time.

The taxpayer received the notice of deficiency and filed the tax court case on July 14, 2008. The IRS Appeals Office contacted the taxpayer via letter on October 21, 2008. The letter stated “[o]ur records do not show the timely filing of your 12/31/2003 federal income tax return” and requested that the taxpayer “Kindly send a copy of the completed Form 1040 for this tax period.”

In November 2008, the taxpayer responded in writing to the Appeals Office. He enclosed a copy of his 2003 tax return that he said was timely filed by his attorney-in-fact. The return showed a stamped signature, not the taxpayer’s actual signature, and had the tax preparer’s signature as the return preparer. The return showed zero taxable income and zero total tax, and claimed an overpayment equal to the amount of tax withheld from the taxpayer’s compensation for the year.

At trial, the return preparer did not recall whether she filed the taxpayer’s 2003 return or sent it back to the attorney-in-fact for filing. The return preparer said that if she had filed the return, she would have done so electronically. The attorney-in-fact said he did not mail the return to the IRS.

The IRS agrees the taxpayer had an overpayment for 2003, and says any refund is barred by the statute of limitations. The taxpayer believes his return was filed timely.

The court first had to decide if the taxpayer filed a return, and when. Based on the testimony, the court could not conclude that either the attorney-in-fact or the tax preparer filed the taxpayer’s 2003 federal income tax return. The court determined that the IRS received a 2003 tax return in November 2008, after the taxpayer received the notice of deficiency and filed the tax court case.

In this situation, where the taxpayer does not file a return or a claim for refund before the IRS issues a notice of deficiency, the taxpayer’s claim for refund is considered filed on the date of the mailing of the notice of deficiency.

Based on the rules above, what do you think? Was the overpayment barred by the statute of limitations, or does the three-year or two-year lookback period apply?

The applicable dates are:

The mailing of the IRS notice of deficiency – May 5, 2008

The due date for filing the 2003 return – August 15, 2004

The deemed date of payment of the income tax withheld – April 15, 2004



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Sorry, wrong answer :(
Right answer!

For the IRS.

Internal revenue code section 6512(b)(1) authorizes the tax court to determine the amount of an overpayment of tax in respect of a taxable year for which a deficiency has been determined. However, code section 6512(b)(3) imposes a limit on the amount of any overpayment that may be credited or refunded, based on a period defined in code section 6511(b)(2).

Internal revenue code section 6511(b)(2) is entitled “Limit on amount of credit or refund.” In a case such as the instant one, where the date of the mailing of the notice of deficiency (May 5, 2008) is beyond the third year after the due date for filing the 2003 return (August 15, 2004, as extended) and no return was filed by the taxpayer before that date (i.e., before May 5, 2008), code section 6511(b)(2)(B) applies to limit the amount of any refund or credit that may be made or allowed.

In that regard, code section 6511(b)(2)(B) provides that “the amount of the credit or refund shall not exceed the portion of the tax paid during the two years immediately preceding the filing of the claim.”

Therefore, because the taxpayer’s claim for refund is deemed to have been filed on May 5, 2008, (see internal revenue code section 6512(b)(3)(B)), only tax paid during the immediately preceding two-year period may be refunded or credited.

The taxpayer paid no income tax other than through withholding from his compensation. Income tax withheld by a taxpayer’s employer is deemed to have been paid by the taxpayer on April 15 of the year immediately following the calendar year for which the tax was withheld. (See internal revenue code section 6513(b)(1).)

Therefore, the taxpayer is deemed to have paid the withheld tax for which he seeks a refund on April 15, 2004. This date, however, is not within the two-year lookback period immediately preceding the date of the notice of deficiency (May 5, 2008), which is the date of the taxpayer’s deemed claim for refund or credit.

Therefore, because the taxpayer did not pay any income tax during the two-year lookback period, he is not entitled to refund or credit of an overpayment for 2003 regardless of its amount.

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