What is the time limit and the method for recovering overpaid estimated tax with and without demonstrating a medical reason for failure to file?

[alexander468]

What is the name of your state? Massachusetts

I'm filing tax returns for the estate of a deceased relative who owned a small sole proprietorship with no employees. He overpaid estimated tax for 2014 by several thousand dollars but did not file a 2014 return (to have it refunded or applied to 2015), and then there were no tax returns for several years until his death. He seemed to stop most bookkeeping in early 2015, but he saved notices and bank account statements that show enough income to require a tax return for some of his other final years but not others. He owed no tax for '15 or '16. Those are the years ('14, '15, and '16) that I've worked out so far, but I'm fairly sure based on some 1099-MISC with no withholding from later years that he did owe and the estate will need to pay tax for those later years.

In his files is an IRS notice CP81 sent in May '18 that the entire estimated tax amount that was paid in '14 was a credit on account, and the notice included the statement

If you don't file your return or contact us, you may lose this credit. The Internal Revenue Code sets strict time limits for refunding or transferring credits.

I have two questions: First, what are the time limits for recovering the '14 overpayment with and without having a medical reason for his failure to file? Second, should I just seek the '14 refund and pay the taxes due in later years as separate actions or file a '14 return that carries the overpayment over to '15 and then file returns for years when they weren't needed '15 and '16 continuing to carry this overpayment to returns for the years when taxes were due?

 

[Taxing Matters]

I have two questions: First, what are the time limits for recovering the '14 overpayment with and without having a medical reason for his failure to file?

The basic time limit for filing a claim for a refund on a federal income tax return is the longer of 3 years from the due date of the return or 2 years from the date the tax was paid. Estimated tax payments for individual income tax returns are considered paid on April 15 of the following tax tax year. Thus a 2014 return needed to be filed no later than April 15, 2018 (3 years from the filing deadline of April 15, 2015) to get the refund. So the 2014 refund is now lost.

Second, should I just seek the '14 refund and pay the taxes due in later years as separate actions or file a '14 return that carries the overpayment over to '15 and then file returns for years when they weren't needed '15 and '16 continuing to carry this overpayment to returns for the years when taxes were due?

Even if you try to carry the refund forward to the 2015 tax year that will not get you credit for the 2014 refund as it is too late.

 

[alexander468]

a 2014 return needed to be filed no later than April 15, 2018 (3 years from the filing deadline of April 15, 2015) to get the refund. So the 2014 refund is now lost.

I was going to write that it seemed unlikely you were correct because it doesn't make sense that the CP81 notice would have been sent in May 2018 if his final deadline had been April 15, 2018. But what you wrote was essentially correct. His records show an Application for Extension of Time To File for the 2014 return, the first return that he ended up never filing. According to https://www.irs.gov/individuals/understanding-your-cp81-notice ,

Generally, you must file a tax return within 3 years from the due date of the return (including extensions) to receive a refund of any overpayment on your account.

An extension to October 2015 would have moved the three year time limit to October 2018, and that makes the May 2018 notice for 2014 overpayments understandable. Thanks for taking the time to reply even though it was not the response I was hoping for.

 

[davew9128]

An approach I might take would be to ask the IRS to move the unapplied 2014 estimated tax payments to another open tax period. There is a provision which allows taxpayers to designate where unapplied payments can be put, so if the 2014 return has not yet been filed, you may want to take some of all of those payments and designate them for another tax period which will have a tax greater than those payments.

 

[Taxing Matters]

An approach I might take would be to ask the IRS to move the unapplied 2014 estimated tax payments to another open tax period. There is a provision which allows taxpayers to designate where unapplied payments can be put, so if the 2014 return has not yet been filed, you may want to take some of all of those payments and designate them for another tax period which will have a tax greater than those payments.

I think the OP will find that the IRS will not do that with a payment with payments that old. Even if the Service Center did that, as the payments would still carry the original payment dates, so that likely would not be much help since the OP states that the taxpayer did not owe for 2015 or 2016 either. 2017 is also past the limitation for refunds at this point. Moving it to later periods would not help because at that point the credits are too old. No harm in asking the IRS to move the payments, but I think the OP should not get high hopes that it will work. By strict application of the Code the taxpayer has lost those payments. When I worked for IRS some years ago in the field I had several taxpayers who tried to do that and the IRS system would not give them credit for it for that reason. I doubt the attempt will be any more successful now.

 

[LdiJ]

I think the OP will find that the IRS will not do that with a payment with payments that old. Even if the Service Center did that, as the payments would still carry the original payment dates, so that likely would not be much help since the OP states that the taxpayer did not owe for 2015 or 2016 either. 2017 is also past the limitation for refunds at this point. Moving it to later periods would not help because at that point the credits are too old. No harm in asking the IRS to move the payments, but I think the OP should not get high hopes that it will work. By strict application of the Code the taxpayer has lost those payments. When I worked for IRS some years ago in the field I had several taxpayers who tried to do that and the IRS system would not give them credit for it for that reason. I doubt the attempt will be any more successful now.

I got something similar to work one time and one time only, but I am pretty sure that the agent handling it was inexperienced.

 

[davew9128]

I got something similar to work one time and one time only, but I am pretty sure that the agent handling it was inexperienced.

I have also gotten it to work for a payment made for an un-filed year and had it moved to another open year. There is authority for it in the IRM, but I have gotten pushback on an instance where the payment was made with an estimate voucher.

 

[alexander468]

There is authority for it in the IRM

Could you direct me to the section of the IRM that deals with this authority?

 

[Taxing Matters]

Could you direct me to the section of the IRM that deals with this authority?

The law allows, with some exceptions, to designate the tax period to apply payments made. The IRM will reflect that. But it won't tell you that a payment moved from an older period to a more recent tax period will automatically be given credit for that tax period. The Code limits the extent to which that can be done, as I stated before. Under the facts you've provided so far, I do not see much you could do to get that 2014 payment refunded/credited by moving it to some later tax period. The way the lookback period under the Code works, you are limited in how many years you can move that payment. Again, no harm in asking the IRS to do it, but if the Service applies the credit with the Code limitations in mind then it may not work. I'd have to see the details of the returns and posted payments to get a more definite idea whether you have a shot here and how to do it.

 

[alexander468]

I'd have to see the details of the returns

The returns haven't been filed yet which is part of the reason why I'm here looking for advice. What sort of details would you be looking for and how would they impact your strategy?

and posted payments to get a more definite idea whether you have a shot here and how to do it.

The first three estimated tax payments were made for 2014 in mid-April, June, and September. There was no January 2015 estimated tax payment for 2014, probably because there was already a very large overpayment for the year. Then there was the extension-to-file request and nothing else. This seems to be a first time event. He was good about paying timely estimated tax for many prior years. I believe I can obtain a medical opinion of cognitive impairment and/or a mental health issue with a likely onset at around that time.