IRS has gone off the rails...

As we are in the process of preparing the client’s 2017 Form 1040, in late summer 2018, IRS sends the taxpayer a letter stating that he has a $4,102.36 overpayment from 2010 being applied to 2017. That is not a typo.

So, we go with it (taxpayer was not my client back then) and we file 2017 with this $4,102.36 overpayment included on or about 9/23/2018. We don't hear another peep about it. We did not know a vital piece of info regarding a 2018 ES payment...see below.

Now in June 2019 we are filing his 2018 Form 1040, and we end up with a $5,004 overpayment on that return, all applied to his 2019 ES. That $5,004 includes a $4,500 ES paid 3rd quarter 2018, on August 18, 2018.

Two days ago we get a letter from the IRS stating his 2018 overpayment to 2019 is only $504, not $5,004, they did not give us credit for the $4,500 ES payment. I asked Fidelity for a copy of the check they cut to the US Treas and lo and behold, the back of the check shows that the IRS coded the check to guess where - 201012 - the tax year 2010. Most likely to cover the erroneous overpayment they claimed we had coming from 2010 in the first place.

Time line:


8/15/2018 Taxpayer mails 3rd Qtr 2018 ES for $4500
8/21/2018 IRS cashed 3rd Qtr 2018 ES for $4500 - Coded to 201012 - did not know this at the time.
9/17/2018 IRS sends letter RE $4,102.36 overpayment from 2010 applied to 2017.
9/28/2018 We file 2017 Form 1040, including overpayment per IRS letter.
6/21/2019 We file 2018 Form 1040, applying $5004 to 2019
8/7/2019 We get a letter from IRS stating $5004 overpayment to 2019 reduced to $504, no credit for $4500 ES paid 8/21/18
8/9/2019 Copy of 3rd quarter 2018 ES check of $4500 shows IRS tax period code of 201012

What in the &%$@ is going on at the IRS?

All I can think is that there was a $397.67 assessment from 2010 out there (client states he was not required to file a 2010 return), which they paid using the $4500 ES payment he made 8/15/2018. A few weeks later (9/17/2018) they send a letter that stated we applied an overpayment to your 2017 return. Why 2017? Because it was not yet filed. We were unaware of the 3rd qtr 2018 ES payment hijacking.

At this point, we are letting it go. But it looks like the IRS has the ability to not only snatch up your overpayments to pay past assessments, but they can divert an estimated tax payment to pay outstanding assessments (that client states he does not owe). We never did get a letter about the 2010 tax assessment of $397.64, taken from the $4500 ES payment.

Anyone else seeing this out there?

I've never had the IRS snatch a payment out from under one of my clients, but it seems perfectly reasonable for them to be able to do that considering they also have the ability to garnish wages or even seize property.

What strikes me as strange is the lack of correspondence regarding the $397.64 assessment (which I agree is probably the source of the problem).

Have you considered asking for the transcript for 2010? There might be an SFR which could be replaced with an original filing. The SOL wouldn't have expired on the reallocated tax payment yet.

What strikes me as strange is the lack of correspondence regarding the $397.64 assessment (which I agree is probably the source of the problem). Have you considered asking for the transcript for 2010? There might be an SFR which could be replaced with an original filing.

I’m wondering the same type of stuff. If there was no (relatively recent) correspondence as to the $397.64, my guess is that the 2010 tax had already been assessed, so all the IRS did was apply the $4,500 estimated tax payment to 2010.

The $64,000 question is this: Is the IRS within its rights to post the 2018 estimate as a payment against an already assessed liability for 2010?

The $64,000 answer is this: It depends. If the 2018 estimate was “properly designated” as such, the IRS cannot just move it to another year. I believe this is the case even though the 2018 taxes hadn’t been assessed at the time the 2018 estimate was made.

See this FSA:

https://www.irs.gov/pub/irs-wd/0247018.pdf

So, was the 2018 estimate “properly designated” as such? I don’t know. There is a chance that if the guy didn’t put anything in the memo field of the check, and merely attached the check to Form 1040-ES, that could be viewed as “not a designation.” (You did say the estimate was mailed, but you said nothing more than that). There was a case (Windover), where the guy owed $X with his return. He attached a check to the return and mailed everything in together. He wrote nothing in the memo field of his check. The IRS applied the payment to some prior year that still had a balance due. IRS wins the case. Totally stupid, but whatever.

Would the same theory apply to a non-memo’d check that accompanies a 1040-ES voucher? I don’t know. I certainly hope it wouldn’t. Rev Proc 2002-26 talks about “written directions,” but I really don’t know what those are. Obviously, a letter that accompanies a payment should work. A designation in the memo field of a check should also work. But, again, what about a non-memo’d check that accompanies a 1040-ES voucher with no letter? There is writing on the 1040-ES voucher, even though it was done by the taxpayer. Shouldn’t that suffice? Would it matter if the check and the coupon were paper-clipped together?

Get a copy of the cancelled check and see what’s in the memo field. If there’s something there, that’s good news. If there is nothing there, you still might have a shot at things. Or, we could just be boring and file a 2010 return to over-ride the SFR, if an SFR is, in fact, what happened. But it seems really odd to me what your client said – “I didn’t have to file in 2010.” How’s that? If there is an SFR, and there’s an assessed liability, there’s got to be 1099’s, W2’s, etc. out there that exceed the filing threshold (assuming the SFR filing status is right). And if there is an SFR, seems odd that the liability would only be a few hundred bucks. Would the IRS really bother with such a thing? And if there is no SFR out there, maybe the guy actually filed a 2010 return and forgot that he did. It all sounds really screwy and lacking…lacking of facts, that is.

Jeff, I believe you have nailed it... the devil is in the details.

Take a guess what Fidelity did not do when they sent the check to the IRS?

They did not put anything other than the TIN on the memo section of the check, AND they did not send the 3rd Qtr 1040-ES voucher with the check. I am sure whoever opened the mail that day at the IRS smiled upon this. They had free reign to put that check wherever they wanted.

From now on Fidelity is sending us the check, and we will send the payment with the appropriate designation on it and with the 1040-ES voucher.

BTJig, IRS doesn't act in the manner you stated. Not even close. If you truly believe the people that process checks care about your client's liability, you may want to find a different line of work.

Mistakes are made. Daily. This one was not on the part of the IRS.

What Jeff-Ohio said is completely correct on all counts. If 2010 was in fact an SFR, I agree that the correct move is to file an Original to Replace the SFR assuming you can legitimately reduce the tax liability.

Since the subject of this thread is very vague, I guess anything remotely related is fair game.

I have a client whose return and large refund was held up because of a small omission on the return. Appropriate response was made to the initial IRS letters, and finally, almost 3 months later, the return was entered into the online transcript system showing both taxpayer reported amounts and "per computer" adjustments, and a letter was sent showing that the refund had been adjusted downward by about $7,000, consistent with the transcript. (This is a mistake, and not the first time I've seen the IRS create a new, bogus problem while trying to update the original problem they wrote about). Letter says refund will be sent in 4-6 weeks.

But when we go to "Where's my refund?" at IRS web site, it shows the full amount of the refund, after the adjustment, to be sent within a few days. So which is correct? The letter showing the delay and significant adjustment, or the web site showing everything is finally OK for the full refund (which is the correct result).

[edit: client just let me know that full refund was received -- so the CP 12 letter that was sent was very inaccurate]

Post script to previous post: a CP21B letter was sent about 2 weeks later, stating "We apologize for the inconvenience, but we made an error on your 2018 Form 1040. To correct our mistake, we adjusted your: tax credits, payments and/or other credits. As a result, you are due a full refund of $xx."

The correction was an additional $7,500 refund (back to what I originally filed).

I've never seen one of those before! (Although I don't generally get a high volume of IRS notices).