It happens when someone fails to file with the IRS. It
might be a “sleeping dog” rationalization, but people will allow a string of tax
years to go unfiled, even if some of those years have refunds rather than tax
due.
This is a trap, and I saw it sprung earlier this year
on a widow. It was unfortunate, as she still has kids at home and could use the
money.
The trap is that tax refunds are not payable after a period
of time. The Code wants closure on tax matters. The IRS has three years to
audit you. You in turn have three years to request a refund. These are general
rules, and there are relief valves for the unusual situation: the IRS can
request you to voluntarily extend the statute, for example, or you can file a
protective claim if your three years are running out.
Let’s look at the Golden case.
Michael Golden did not file his 2015 tax return. In
fact, he waited so long that the IRS prepared a return for him (called a
substitute for return or SFR). The IRS does not spot a taxpayer any breaks when
they do this (no itemized deductions or head of household status, for example).
The IRS instead is trying to get a taxpayer’s attention, prompting them to file
a return and opt back into the system. In April 2021 (five years after the
return was actually due) the IRS issued its notice of deficiency (NOD, sometimes
referred to as SNOD). The SNOD is the IRS trying to perfect its assessment
prior to sending the account to Collections for their tender mercies. The SNOD
showed tax due.
A few days after receiving the SNOD, Golden filed his
2015 tax return. It showed a refund.
Of course.
Golden wanted his refund. The IRS said it could not
issue a refund.
There is a technical rule.
Here it is:
Section 6511(a) Period of limitation on filing claim.
Claim for credit or refund of an
overpayment of any tax imposed by this title in respect of which tax the
taxpayer is required to file a return shall be filed by the taxpayer within 3
years from the time the return was filed or 2 years from the time the tax was
paid, whichever of such periods expires the later, or if no return was filed by
the taxpayer, within 2 years from the time the tax was paid. Claim for credit
or refund of an overpayment of any tax imposed by this title which is required
to be paid by means of a stamp shall be filed by the taxpayer within 3 years
from the time the tax was paid.
Tax law can be tricky, but there are two
rules here:
(1) The default period
is three years (to coincide with the statute of limitations). The period starts
on April 15 (when the return is due) and ends 3 years later, unless one requested
an extension, in which case the default period also includes the extension (normally
to October 15).
(2) Refuse to go
along with the default rule and you might trigger the second rule: only taxes
paid within two years of filing can be refunded.
As a generalization, you do not want the second
rule. Why limit yourself to taxes paid within two years when you can have taxes
paid within three years (and the extension period, if an extension was
requested).
The IRS was also looking
at this shiny:
Section 6511(b) Limitation
on allowance of credits and refunds.
(1)
Filing of claim within prescribed period.
No credit or refund shall be allowed
or made after the expiration of the period of limitation prescribed in
subsection (a) for the filing of a claim for credit or refund, unless a claim
for credit or refund is filed by the taxpayer within such period.
Notice that Congress included the phrase “shall be
allowed.” Another way to say this is that – if you do not fit within the three-year
test or the two-year test – your refund claim “shall” not be allowed. This was
the IRS position: hey, we do not have much discretion here.
Let’s review the dates for Golden.
We are talking about his 2015 return. The return was
due April 15, 2016. Add three years. Let’s be kind and add three years plus the
extension. His three years clock-out on October 15, 2019. Three years will not
get you to a refund.
The two year rule is even worse.
Golden argued fairness. He was working in the private
sector as well as the Navy Reserve, and the demands therefrom made his life “extremely
difficult.” In tax terms, this argument is referred to as “equity.” Some courts
can consider equitable arguments, but the Tax Court is not one of them.
Here is the Court:
We sympathize with petitioner’s
predicament.
The Supreme Court has made clear that the limitations on
refunds of overpayments prescribed in section 6512(b)(3) shall be given effect,
consistent with Congress’s intent as expressed in the plain text of the
statute, regardless of any perceived harshness to the taxpayer. See
Commissioner v. Lundy, 516 U.S. at 250–53. Because Congress has not given us
authority to award refunds based solely on equitable factors, we are compelled
to grant respondent’s Motion for Summary Judgment.”
It was not a total loss for Golden, however. Since he did
file a return, the IRS reduced his 2015 tax due to zero. He did not owe
anything. He could not, however, recover any overpayment. He left that 2015
refund on the table.
What do you do if you are caught in a work situation
like Golden? It is not a perfect answer, but file with the information you can
readily assemble. Pay someone to prepare the return (within reason, of course).
Hey, maybe you missed interest on a small money market account or took the
standard deduction when itemized deductions would have given you a smidgeon more.
The IRS will let you know about the first one (computer matching), and if there
is enough money there you can amend later (the second one). At least you will
get your basic refund claim in.
Our case this time was Golden v Commissioner,
T.C. Memo 023-103.
No comments:
Post a Comment