You file a
tax return showing tax due (before withholdings) of $503.
You have
withholdings of $1,214.
You
therefore have a refund of $711 ($1,214 - $711).
The IRS
takes your refund because you owe taxes for another year.
The IRS later
audits your return. It turns out that you owe another $1,403.
Question: Can you get back the $711 that went
who-knows-where?
The tax lingo
is the “right of offset.”
Here is Code section 6402(a):
(a) General rule
In the
case of any overpayment, the Secretary, within the applicable period of
limitations, may credit the amount of such 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 shall, subject to … refund
any balance to such person.
The pace car
in this area was Pacific Gas &
Electric Co v U.S.
Pacific Gas &
Electric had an overpayment for 1982 of almost $37 million. It filed for a refund,
and the IRS included interest for sitting on PG&E’s money well into 1988. However,
the IRS miscalculated and overpaid interest by approximately $3.3 million.
The IRS
wanted its money back, but what to do?
In 1992 PG&E
filed another refund on the same tax year!
So the IRS lopped-off
$3.3 million as an “offset” for the earlier interest overpayment.
On to Court
they went. There were tax-nerd issues, such as the tax years under dispute having
closed under the statute of limitations. That issue did not concern the Court.
What did concern the Court was whether the IRS was correct in shorting a tax refund
by its previous overpayment of interest.
The IRS can clearly
offset for a tax.
But was the interest
paid PG&E the equivalent of a tax?
And the
Court decided it was not:
· Interest you (as a taxpayer) owe the
IRS is considered a “deemed” tax thanks to Section 6601(e).
Any reference to this
title (except subchapter B of chapter 63, relating to deficiency procedures) to
any tax imposed by this title shall be deemed also to refer to interest imposed
by this section on such tax.”
· But there is no Code section going the
other way - that is, when the IRS pays you interest.
PG&E won
its case and kept the interest.
Back to our
taxpayer.
He did not
have a chance of having the IRS return the $711 it had previously applied to
another tax year. What made his case interesting is that his offset year was
audited, resulting in an addition to his tax. It made sense that he would want his
withholding to be applied to its proper tax year before the IRS went offsetting
everything in sight.
It made
sense but it was not the correct answer. The IRS’ authority to offset is quite broad.
BTW, the
offset is not just for taxes. It can be for student loans or monies owed to
state agencies (think child support). The
offset is not limited to your tax refund either: your federal retirement and
social security can also be offset.
