SOL question

[Nashville]

Taxpayer does not file a return for 2007. Based on 1099s with no known deductions, IRS assesses a liability of $50,000 for that year and begins collection proceedings at some point.

Taxpayer does (timely) file a tax return for 2010, and has a refund of $6,000. IRS applies all of the $6000 to the $50,000 liability for 2007. Faced with staggering collection activity, taxpayer finally files his 2007 return. After taking legitimate deductions and because he has a family, he has a refund of $1500 for 2007. IRS notifies taxpayer that his 2007 return has been received and the assessment of $50,000 is removed. However, they will not refund the $1500 for 2007 because it is beyond the 3-year statute.

Cannot dispute the SOL for 2007. No refund forthcoming. However his $50,000 assessment for that year has been cancelled. So what about the $6000 from his timely filed 2010 return that they applied to this now fictitious liability? Should this $6000 be returned to him? An inquiry has been sent to the IRS but the only response is that they have disallowed the $1500 from 2007. (Repetition of what they've already told us).

An appeal letter has been sent over a year ago with no response. Telephone conversation reveals IRS claims they never received the correspondence even though we have return receipt when postage was paid.

What say ye? Should he receive his $6000 back? Is there a cite for this?

[kathyc2]

Taxpayer does not file a return for 2007. Based on 1099s with no known deductions, IRS assesses a liability of $50,000 for that year and begins collection proceedings at some point.

Taxpayer does (timely) file a tax return for 2010, and has a refund of $6,000. IRS applies all of the $6000 to the $50,000 liability for 2007. Faced with staggering collection activity, taxpayer finally files his 2007 return. After taking legitimate deductions and because he has a family, he has a refund of $1500 for 2007. IRS notifies taxpayer that his 2007 return has been received and the assessment of $50,000 is removed. However, they will not refund the $1500 for 2007 because it is beyond the 3-year statute.

Cannot dispute the SOL for 2007. No refund forthcoming. However his $50,000 assessment for that year has been cancelled. So what about the $6000 from his timely filed 2010 return that they applied to this now fictitious liability? Should this $6000 be returned to him? An inquiry has been sent to the IRS but the only response is that they have disallowed the $1500 from 2007. (Repetition of what they've already told us).

An appeal letter has been sent over a year ago with no response. Telephone conversation reveals IRS claims they never received the correspondence even though we have return receipt when postage was paid.

What say ye? Should he receive his $6000 back? Is there a cite for this?

Just taking a stab here.... Was the 1,500 due to overpayment of tax as opposed to refundable credits? Were the potential refundable credits more than the 1,500? In other words, if the return had been filed in SOL and the refundable credits were 7,500 (they were then used against SE tax when return filed) then I would say that the 6K would not now be refundable as they did not make a claim for the refundable credits in the time allowed.

[Nashville]

Refundable Credits

As he had a family in 2007, for purposes of information, let's assume that there would have been no refund had there not been earned income credit, excess child credit, or other refundable credits. In other words, no refund other than what occurred as a result of refundable credits.

Don't know that it makes (or does not make) any difference, but an interesting perspective, Kathy. For the record, the SOL did run out for 2007 but not for 2010. Everything was timely for 2010, and the clock has been extended by IRS and by appeal.

[kathyc2]

For the record, the SOL did run out for 2007 but not for 2010.

I understood that. I'm saying that maybe the 6K from the 2010 refund paid his 2007 SE tax. If his 2007 return would have been timely filed the refundable credits would have offset the SE tax, but since he didn't file in time to receive the credits, they may be lost. I don't have anything authoritative as to that is how it works, but it seems like a logical way to handle it from my perspective. But, if that is what did happen, the IRS should have informed you/him as to where the 6K was applied.

I've never really thought about it before, but I wonder when the SE earnings get posted to the SSA earnings record. Is it when the return is filed, or at a later time if the amount is not paid with the return?

[TXEA]

Have you reviewed a copy of the 2007 return that was filed to see what payments and/or credits resulted in the overpayment? I assume the $6000 was credited to the tax liability since 2007 was filed after 2010.

It would help to know how the overpayment amount was computed.

[Nashville]

Yes I have

Have you reviewed a copy of the 2007 return that was filed to see what payments and/or credits resulted in the overpayment? I assume the $6000 was credited to the tax liability since 2007 was filed after 2010.
It would help to know how the overpayment amount was computed.

I try not to introduce more information that may obscure the issue, but will gladly do so if it will help.

Taxpayer was a contractor and 2007 was the beginning of the recession for him. He paid zero ($0) dollars in estimated tax and had zero ($0) tax withheld since he was not an employee. He had a wife that didn't work, and had four children. For purposes of this discussion, please be assured that anything in the "payments" section of his return were all refundable credits of one kind or another.

Less than stellar income in 2007, houseful of kids, etc. meaning the refundable credits exceed his tax and SE tax by $1500. (all numbers are fictitious but reasonably close)

Remember the focus is on whether his 2010 refund being viable, we already know his 2007 dies on the vine of the SOL. The $6000 was applied to the large liability resulting from the substitute return for 2007. Such liability no longer exists.

Thanks to all for your interest.

[Roland Slugg]

I believe your client should file F-843, "Claim for Refund."

[taxea]

To my knowledge credits that were applicable in 2007 would be appropriate to include in the return for that year. If the IRS has received the 2007 and, thus, accepted the return by voiding their 50k bill all is well with that.
Does the client have any documents to prove the request for refund of the 6k from 2010 was requested? Do you have a copy of the 2007 that was filed.
Are you an EA or CPA? If not, you might want to refer your client to one.
With a POA from the client go to E-Services and ask for an accounting and tax transcripts for 2007 through currently filed year. The accounting will have the date the 6k was posted to 2007 and what they did with it after 2007 was filed. If there is any information that allows you to track the 6k snd it to them with a F982 asking again for the refund of the 6k. If the 6k was taken from the 2010 return which was timely filed and they have already acknowledged he didn't owe for 2007, he is entitled to the 6k.
If you still can't get anywhere with them call or contact Tax Payer Advocate and explain the problem in detail.

[DaveO]

Don't you still only have three years from the due date of the return or "when the tax is paid" to seek a refund? In this case the tax would have been "paid" around 4/15/2011. If he filed after 4/15/2014 then the three years would have ran on the refund as well. I'm just inserting dates for sake of argument not knowing the actual dates.

[taxea]

as I understand it they took the 6K from a timely filed return to pay a tax debt that didn't exist once the 2007 was filed. Unless the information posted is wrong and the 6K was, in fact, used to pay 6K of liability for 2007. It is possible that the 6K is now sitting, as a credit in the TP's IRS account. You will only know if you review a copy of the accounting for all years from 2007 forward. The IRS is not in the habit of refunding payments made that were not due. The 6K is somewhere in the records. To make your case you have to find it.
To answer the question, if the 2010 return was timely filed and the 6K taken from it was not actually needed to pay 2007 then, yes, it is refundable.

[Nashville]

Old year is enjoined

Don't you still only have three years from the due date of the return or "when the tax is paid" to seek a refund? In this case the tax would have been "paid" around 4/15/2011. If he filed after 4/15/2014 then the three years would have ran on the refund as well.

Good observation DaveO. I've wondered about this myself. The taxpayer and I began work on this with an appointment with an IRS collection officer on May 2, 2014, so your point is perhaps valid. But I believe the IRS enjoined the clock on 2010 when they tampered with his refund. The SOL can be extended forever if either party raises it during the valid period. At least that is my belief.

[taxea]

Good observation DaveO. I've wondered about this myself. The taxpayer and I began work on this with an appointment with an IRS collection officer on May 2, 2014, so your point is perhaps valid. But I believe the IRS enjoined the clock on 2010 when they tampered with his refund. The SOL can be extended forever if either party raises it during the valid period. At least that is my belief.

The SOL for refund/audit is three years, for assessment it could extend from 3 to 7 years, for collection it is 10 years (not forever). I still maintain that if the 6K was taken from the 2010 when it was timely filed to pay 2007 which turned out not to have a liability then the 6K is refundable. Get an accounting for all years and track the 6K so you can make a detailed request for the refund.

[New York Enrolled Agent]

[QUOTE=taxea;177287]The SOL for refund/audit is three years, for assessment it could extend from 3 to 7 years, for collection it is 10 years (not forever). QUOTE]

taxea - you write in your posts believe nothing until verified - I don't believe there is any 7-year assessment statute. Can you verify that with a cite?


Nashville & Dave O.
Relevant to your questions, the SOL in §6511 is really two components. The first, when is a refund claim timely (the period you can request a refund) and secondly, if timely requested, what's the period of time the tax was paid to determine the amount of the refund.

I've snipped a bit from a SC decision (Brockamp) - see if the language helps.

Taxpayers who file returns have three years from the time they filed their return or two years from the time they paid their taxes to claim a refund. . A refund cause of action must be timely filed under one of the limitations periods in Section 6511(a) ...

In addition to the time limitations of Section 6511(a), Section 6511(b) limits the amount of a refund recoverable by a claimant. Specifically, if a person files a timely claim within the three-year period mentioned in Section 6511(a), the amount of a refund is limited to the portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3 years plus the period of any extension of time for filing the return.

Nashville - the SOL for assessment can be extended forever if a taxpayers fails to file a return or files a fraudulent return but not in a situation such as yours..

[taxea]

I answer posts based on my knowledge and experience. I do not do your research for you. If you question my response the read the statute.

[New York Enrolled Agent]

I answer posts based on my knowledge and experience. I do not do your research for you. If you question my response the read the statute.

LOL - there is NO 7-year statute. Your knowledge and experience are overruled by IRC §6501