Primer On Research Expenses And The Research Credit

[In case you were wondering what a tax CPA does during weekdays, I drafted the following for a fellow CPA as a walkthrough through the tax terrain for research expenses and the related – but different – research credit. It is not recreational reading, but hopefully it may help another tax practitioner out there – CTG].

 

The research & development tax credit has been around since the early 1980s. Initially, only the largest of corporations seemed able to meet its requirements. The passage of years introduced more realistic standards, allowing even modest companies to benefit. Its decades of changes, requirements, limitations and alternate calculations make this a challenging area for almost any tax practitioner.

Let’s take a brief dive into the research credit.

Analysis of the credit, oddly enough, does not begin with a tax credit itself. No, it begins with the deduction for research expenses.

         § 174 Amortization of research and experimental expenditures.

(a)  In general.

In the case of a taxpayer's specified research or experimental expenditures for any taxable year-

(1) except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and

(2)  the taxpayer shall-

(A)  charge such expenditures to capital account, and

(B)  be allowed an amortization deduction of such expenditures ratably over the 5-year period (15-year period in the case of any specified research or experimental expenditures which are attributable to foreign research (within the meaning of section 41(d)(4)(F) )) beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.

 For years – decades actually – research and experimental expenses were deductible as incurred, although the taxpayer had the option to capitalize and amortize such expenses if preferred. For taxable years beginning on or after January 1, 2022, however, that option has been eliminated. Research and experimental expenditures must now be capitalized and amortized (that is, spread out over time). The only difference is the period:

·       Domestic research is amortized over 5 years.

·       Foreign research is amortized over 15 years.

This is a sea change in the treatment of such expenses. Many practitioners – including me – have only known one option, and that was the immediate deduction of relevant expenses. Granted, amortization does not mean the deductions are lost; it means only that the deduction is spread over a period of years. If the company is unprofitable (think a start-up), the difference between immediate deduction and amortization may be minimal. Take a mature company (Pfizer, for example), and the difference could be dramatic.

What type of expenses qualify for the Section 174 deduction?

·       Wages paid to employees directly involved in R&D, and individuals who support and supervise their work. Support or supervise is defined as one level above or below.   

·       Supplies and raw materials.

o   There is an issue here about depreciable equipment. In general, the taxpayer decides the matter by capitalizing or not capitalizing the equipment. If it does, then the equipment is not considered supplies and cannot be included in the expense pool.

·       Work performed by a third party, as long as the business retains the risk of failure.

·       Patent costs

·       Certain overhead expenses (think a research lab)

Now, we know that wages may qualify for the Section 174 deduction, but obviously not all wages will qualify. There are additional “qualities” for an expense to qualify as Section 174 expenses:

·       A permitted purpose

The underlying activity in which wages are incurred must relate to a new or improved business purpose. For example,

o   Something functions (at all)

o   Something functions more reliably

o   Something functions more efficiently 

·       Technological in nature

o   Must be based on a hard science

§  Think engineering, physics, chemistry

§  Scratch sociology and the like  

·       Elimination of uncertainty

o   There must be a realistic question whether the idea will work.

§  Mind you, it does not have to work, but there must be an initial question (or oppositely, a hope) that it will.  

·       Process of experimentation

o   Think classic trial and error.

There are best-practice recordkeeping standards for these expenses. At this point (that is, deduction), such practices may or may not be critical, but the recordkeeping becomes critical as we leave Section 174 and go to the tax credit under Section 41.

             § 41 Credit for increasing research activities.

(a)  General rule.

For purposes of section 38, the research credit determined under this section for the taxable year shall be an amount equal to the sum of-

(1)  20 percent of the excess (if any) of-

(A)  the qualified research expenses for the taxable year, over

 

(B)  the base amount,

(2)  20 percent of the basic research payments determined under subsection (e)(1)(A) , and

(3)  20 percent of the amounts paid or incurred by the taxpayer in carrying on any trade or business of the taxpayer during the taxable year (including as contributions) to an energy research consortium for energy research.

The research tax credit is a big deal because it gives you a second tax bang for doing something you were doing anyway. First, you get to deduct the expense of doing something (immediately under old law; over time under the new law). Second, you get a tax credit on top of the deduction.

The tax credit can be – to be diplomatic – confusing.

There are two main paths:

       

·       The regular credit

·       The alternate simplified credit

 

The Regular Credit

 

The regular credit begins with an odd question:

·       Did you have qualifying research expenses (QREs) before 1984?

If the answer is yes, you will have to accumulate information from the 1980s to calculate the credit, This requirement has been enough to break the hearts of many seeking the research credit.

If the answer no, then calculations become more doable.

The basic calculation is:

Current QREs – base amount = excess QREs         

The base amount involves a five-year period and can be any 5 years between the company’s 5th and 10th taxable year.     

Add up the 5-year QREs. [A]

Add up the 5-year gross receipts [B]

Divide [A] by [B] (called the fixed base percentage)

Let’s pause for a moment.

For its first 5 years, the company can just use 3% for its fixed base percentage.  

The fixed base percentage cannot exceed 16% (i.e., once outside the five year window).

 Back to math. 

Multiply the fixed base percentage by average annual gross revenues for the 4 preceding years (this is called the “base amount”).

Use the greater of the base amount or 50% of current QREs.

Subtract that amount from current year QREs (let’s call this the golden earring).

 Now what?

We multiply the golden earring by a percentage.

Easy: 20%, right?

Nothing is easy.

If we use 20%, then we have to add the amount of the research credit back into taxable income, meaning there is a loop-the-loop.

Fortunately, one can elect to use a reduced credit to avoid the loop-the-loop. The reduced credit is directly tied to the maximum corporate tax rate. Presently the maximum rate is 21%, so the reduced credit would be 20% times 79% = 15.8%.

The election must be claimed on an original, timely filed return and is good only for the year of election.

 Let’s look at an example. 

 

Current year QREs					164,000
Sum of 5-year QREs		[A]	250,000
Sum of 5-year gross receipts		[B]	960,000
Fixed base percentage			26%
Limit on fixed-base percentage				16%
Average gross receipts preceding 4 years				744,000
Base amount				119,040
Greater of base amount or 50% of current QREs					119,040
Subtract					44,960
Credit rate					20%
Credit					8,992

 

The Alternative Simplified Credit

This option came into the Code in 2007, offering an alternative to working with (possibly) decades-old data, There is a price for the simplification, though:     

The credit is 14% if the company has at least 3 years of QREs, otherwise … 

The credit is a flat 6% of current year QREs.  

You again have the loop-the-loop or you can elect to use the reduced credit. 

The nice part of the calculation is that you look at only the three years preceding the current year. 

Here is an example.  

Current year QRE					164,000
Average QREs previous 3 years			[A]	105,000
Multiply [A] by 50%					52,500
Subtract					111,500
Credit rate					14%
Credit					15,610

 

              

 

Here is an example with the reduced credit. 

Current year QRE					164,000
Average QREs previous 3 years			[A]	105,000
Multiply [A] by 50%					52,500
Subtract					111,500
Credit rate					11%
Credit					12,265

 

              

 

 

What if the company does not have 3 years of QREs? Then a flat 6% of current QREs applies.  

Current year QRE						164,000
Average QREs previous 3 years			[A]
Multiply [A] by 50%						0
Subtract						164,000
Credit rate						6%
Credit						9,840

              

              

 

 

The Payroll Tax Offset Option

The PATH Act of 2015 introduced yet another option to the research credit: use it instead to offset employer payroll tax.

More specifically: 

(1)  The offset applies to both the social security portion (6.2%) and Medicare portion (1.45%) of the employer FICA tax.

(2)  There is a $500,000 maximum.

(3)  Only companies with gross receipts for 5 years or less (think startups) qualify.

(4)  Only companies with gross receipts of $5 million or less in the year of the election qualify.

(5)  The election goes with the income tax return.

(6)  The offset applies to the first payroll tax quarter after the company files its income tax return.

(7)  Any unused credit carries over to the next payroll tax quarter.

(8)  Any ultimately unused credit, however, will not be refunded.

The provision was clearly directed at companies with payroll tax obligations but little or no immediate income tax liabilities to sop up that research credit.

Be cautioned, however: you would be exposing your tax filings (both income and payroll) to heightened scrutiny. R&D credits are a high priority for the IRS.

 

A Current Individual Tax Audit

 

We have an IRS audit at Galactic Command. It is of a self-employed individual. The self-employeds have maintained a reasonable audit rate, even as other individual audit rates have plummeted in recent years.

I was speaking with the examiner on Friday, lining up submission dates for records and documents. We set tentative dates, but she reminded me that Congress was going into budget talks this weekend.  Depending on the resolution, she might be furloughed next week. No prob, we will play it by ear.

This is a relatively new client for us. We did not prepare the records or the tax returns for the two years under audit. We requested underlying records, but there was little there for the first year and only slightly more for the second. We then did a cash analysis, knowing that the IRS would be doing the same.

COMMENT: The IRS will commonly request all twelve bank statements for a business-related bank account. The examiner adds up the deposits for the twelve months and compares the total to revenues reported on the tax return. If the tax return is higher, the IRS will probably leave the matter alone. If the tax return is lower, however, the IRS will want to know why.

We had a problem with the analysis for the first year: our numbers had no resemblance to the return filed. Our numbers were higher across the board: higher deposits, higher disbursements, higher excess of deposits over disbursements.

Higher by a lot.

The accountant asked me: do you think …?

Nope, not for a moment.

Implicit here is fraud.

There are two types of tax fraud: civil and criminal. Yes, I get it: if you have criminal, you are virtually certain to have civil, but that is not our point. Our point is that there is no statute of limitations on civil fraud. The IRS could go back a decade or more - if they wanted to.

I do not see fraud here. I do see incompetence. I think someone started using a popular business accounting software, downloading bank statements and whatnot to release their inner accountant. There are easy errors to one not familiar: you do not download all months for an account; you do not download all the accounts; you fail to account for credit cards; you fail to account for cash transactions.

OK, that last one could be a problem, if significant.

The matter reminded me of a famous tax case.

It is easy to understand someone committing fraud on his/her tax return. Put too much in, leave too much out. Do it deliberately and with malintent and you might have fraud.

Question: can you be responsible for your tax preparer’s fraud?

Vincent Allen was a UPS driver in Memphis. He used a professional preparer (Goosby) for 1999 and 2000.  Allen did the usual: he gave Goosby his W-2, his mortgage interest statement, property taxes and whatnot. Standard stuff.

Goosby went to town on miscellaneous itemized deductions; He goosed numbers for a pager, computer, meals, mileage and so forth. He was creative.

The IRS came down hard, understandably.

They also wanted fraud penalties.

Allen had an immediate defense: the three-year statute had run.

The IRS was curt: the three years does not apply if there is fraud.

Allen argued the obvious:

How was I supposed to know?

Off to Tax Court they went.

The Court looked at the following Code section:

 § 6501 Limitations on assessment and collection

(c)  Exceptions.

(1)  False return.

In the case of a false or fraudulent return with the intent to evade tax, the tax may be assessed, or a proceeding in court for collection of such tax may be begun without assessment, at any time.

The Court noted there was no requirement that the “intent to evade” be the taxpayer’s.

The statute was open.

Allen owed tax.

The IRS - in a rare moment of mercy - did not press for penalties. It just wanted the tax, and the Court agreed.

The Allen decision reminds us that there is some responsibility when selecting a tax preparer. One is expected to review his/her return, and – if it seems too good …. Well, you know the rest of that cliche.

Do I think our client committed fraud?

Not for a moment.

Might the IRS examiner think so, however?

It crossed my mind. We’ll see.

Our case this time was Allen v Commissioner, 128. T.C. 37.

A Bad Idea

I am reading an abstract for an upcoming article in the Southern California Law Review.

When an electricity provider wants customers to pay their bills monthly, it sends them a bill each month. Yet this is not how the tax system works, at least for independent contractors. Their taxes are due quarterly, but they receive a tax statement (Form 1099) only one time a year. It is up to the individual, then, to know when their taxes are due and how to pay them, and it is on that individual to estimate how much they owe each quarter. As a result, compliance for independent contractors – particularly for online platform workers–tends to be lacking. Failure to pay their estimated taxes subjects these taxpayers to potential penalties and causes the government to collect less tax revenue.

Yep, quarterly taxes for the self-employed. I know a lot about the topic.

There is a simple, yet entirely overlooked, reform that could vastly improve compliance when it comes to paying estimated taxes: third-party information returns (Form 1099s) should be issued to taxpayers on a quarterly basis. The idea is straightforward and intuitive. If the government wants people to pay taxes four times per year, it needs to effectively “bill” them four times per year. This idea is supported by social science research showing that, the more taxpayers are reminded to pay their taxes, the more likely they are to do so.

Sigh.

If only it were so simple.

Unspoken is an arrogance that accounting is just pushing a button. Everything is automated, right, so what is the issue?

Much is automated. More so today than when I started, and it will be more so again when I eventually retire. But much is not all. Much is not necessarily even much.

The presumption that Fortune 500 accounting departments are the norm for businesses will lead to erroneous conclusions, including the one above. There are over 30 million companies in the United States. Less than 1 percent of those are publicly traded, and the Fortune 1000 constitutes a fraction of that fraction. There is an entire economic sector - the self-employeds, the small- and mid-market companies - that are unlikely to have an accountant - much less an accounting department - available to respond to the whims of nonserious minds. Most CPAs - including me – advise that market. When we meet with ownership, we meet with the owner or owners, not an assemblage at an annual shareholder meeting.  When decisions are required, the number of decision makers is few; in many cases, it is only one.

Somehow this overlooked sector represents roughly half of all economic activity and approximately two-thirds of all jobs created in the United States since the 1990s. This sector employs tens of millions, allowing them home ownership, EV purchases, private schools, higher education, smart phones, streaming services, and perhaps an occasional vacation to Disney World.

Can this sector push a button to generate quarterly 1099s because a professor thinks the idea has been “entirely overlooked?” Maybe, but probably not. More likely, they will call their CPA – assuming they have one.

That quarterly 1099 is somehow now in my court.

CPAs want to go home, too.

Then there is the issue of who will prepare these 1099s. I know that accounting literature is not a thing, but glance at the following:

Statistics from the AICPA suggest that 75 percent of current CPAs will retire in the next 15 years.

Does this seem like an appropriate time to further add to the problems of accounting? Many already see a profession facing future demands exceeding its ability to supply.

No, I don’t think that quarterly 1099s are a bright idea.

In fact, maybe the Congressional effort in 1986 to move almost all taxable year-ends to December 31, further compressing our work schedule was – in retrospect – not such a bright idea.  

Notices are the bane of tax practice. One may be a gifted practitioner but send enough penalty notices and even a loyal client begins to question. Maybe the decades of Congress “balancing” budget bills by increasing tax penalties on virtually anything that moves was not such a bright idea.

Maybe the relentless introduction of arbitrary, inconsistent if not preposterous – other than as blatant money grabs - tax laws was not such a bright idea.

Maybe passing tax laws late in the year when there is no time for advisors to react – or even better, passing those laws the following year but with retroactive effect – was not such a bright idea.

Maybe the hubris that just one more surtax, deduction or tax credit will somehow solve the enduring difficulties of the species and pave the highway to heaven was not such a bright idea. 

We are showered by sententious minds bringing bright ideas.

They should be entirely overlooked.

Unforced Error on Short Stop

 I am reading a case concerning interest expense. While I have seen similar accounting, I do not recall seeing it done as aggressively.

Let’s talk about it.

Bob and Michelle Boyum lived in Minnesota and owned a company named Short Stop Electric. Bob was primarily responsible for running the company. Michelle had some administrative duties, but she was mostly responsible for raising the nine Boyum children.

Short Stop was a C corporation.

Odd, methinks. Apparently, the Court thought so also:

One might regard this as an eccentric choice for a small, privately owned business because income from C corporations is taxed twice.”

Let’s talk about this taxed-twice issue, as it is a significant one for tax advisors to entrepreneurial and closely held companies.

Let’s say that you start a company and capitalize it with a $100 grand. Taxwise, there are two things going on.

At the company level you have:

                   Cash                     100,000

                   Equity                 (100,000)                                 

The only thing the company has is the $100 grand you put in. If it were to liquidate right now, there would be no gain, loss, or other income to the company, as there is no appreciation (that is, deferred profit) in its sole asset – cash.

At a personal level, you would own stock with a basis of $100 grand. If the company liquidated and distributed its $100 grand, your gain, loss, or other income would be:

          $100 grand (cash) - $100 grand (basis in stock) = -0-

Make sense.

Let’s introduce a change: the company buys a piece of land for $100 grand.

At the company level you now have:

                   Land                     100,000

                   Equity                 (100,000)

Generally accepted accounting records the land at its acquisition cost, not its fair market value.

Now the change: the land skyrockets. It is now worth $5 million. You decide to sell because … well because $5 million is $5 million.

Is there tax to the company on the way out?

You betcha, and here it is:

          $5 million - $100 grand in basis = $4.9 million of gain

          Times 21% tax rate = $1,029,000 in federal tax

          $5 million - 1,029,000 tax = $3,971,000 distributed to you

Is there tax to you on the way out?

Yep, and here it is:

          $3,971,000 - 100,000 (basis in stock) = $3,871,000 gain

          $3,871,000 times 23.8% = $921,298 in federal tax

Let’s summarize.

How much money did the land sell for?

$5 million.

How much of it went to the IRS?

$1,950,298

What is that as a percentage?

39%

Is that high or low?

A lot of people - including me - think that is high. And that 39% does not include state tax.

What causes it is the same money being taxed twice – once to the corporation and again to the shareholder.

BTW there is a sibling to the above: payment of dividends by a C corporation. Either dividends or liquidation will get you to double taxation. It is expensive money.

Since the mid-80s tax advisors to entrepreneurial and closely held businesses have rarely advised use of a C corporation. We leave those to the Fortune 1000 and perhaps to buyout-oriented technology companies on the west coast. Most of our business clients are going to be S corporations or LLCs.

Why?

Because S corporations and LLCs allow us to adjust our basis in the company (in the example above, shareholder basis in stock was $100 grand) as the company makes or loses money. If it makes $40 grand, shareholder basis becomes $140 grand. If it then loses $15 grand, basis becomes $100 grand + $40 grand - $15 grand = $125 grand. 

The reason is that the shareholder includes business income on his/her individual return and pays taxes on the sum of business and personal income. The effect is to mitigate (or eliminate) the second tax – the tax to the shareholder – upon payment of a dividend or upon liquidation.

Back to our case: that is why the Court said that Short Stop being a C corporation was “an eccentric choice.”

However, Bob had a plan.

Bob lent money to Short Stop for use in its business operations.

Happens all the time. So what?

Bob would have Short Stop pay interest on the loan.

Again: so what?

The “what” is that no one – Short Stop, Bob, or the man on the moon – knew what interest rate Bob was going to charge Short Stop. After the company accounting was in, Bob would decide how much to reduce Short Stop’s profit. He would use that number as interest expense for the year. This also meant that the concept of an interest rate did not apply, as interest was just a plug to get the company profit where Bob wanted.   

What Bob was doing was clever.

There would be less retained business profit potentially subject to double taxation.

There were problems, though.

The first problem was that Bob had been audited on the loan and interest issue before. The agent had previously decided on a “no change” as Bob appeared receptive, eager to learn and aware that the government did not consider his accounting to be valid.

On second audit for the same issue, Bob had become a recidivist.

The second problem was: Short Stop never wrote a check which Bob deposited in his own bank account. Instead, Short Stop made an accounting entry “as if” the interest had been paid. Short Stop was a cash-basis taxpayer. Top of the line documentation for interest paid would be a cancelled check from Short Stop’s bank account. Fail to write that check and you just handed the IRS dry powder.

The third problem is that transactions between a company and its shareholder are subject to increased scrutiny. The IRS caught it, disallowed it, and wanted to penalize it. There are variable interest rates and what not, but that is not what Bob was doing. There was no real interest rate here. Bob was plugging interest expense, and the resulting interest rate was nonsensical arithmetic. If Bob wanted the transaction to be respected as a loan and interest thereon, Bob had to follow normal protocol: you know, the way Bank of America, Fifth Third or Truist loan money. Charge an interest rate, establish a payment schedule, perhaps obtain collateral. What Bob was doing was much closer to paying a dividend than paying interest. Fine, but dividends are not deductible.

To his credit, Bob had been picking up Short Stop’s interest expense as interest income on his personal return every year. This was not a case where numbers magically “disappeared” from one tax return to another. It was aggressive but not fraud.

Bob nonetheless lost. The Court disallowed the interest deductions and allowed the penalties.

My thoughts?

Why Bob, why? I get the accounting, but you were redlining a tax vehicle to get to your destination. You could have set it to cruise control (i.e., elect S status), relaxed and just …moved … on.

Our case this time was Short Stop Electric v Commissioner, T.C. Memo 2023-114.

Waiting Too Long For Refund Of Excess Withholdings

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.