Unfiled prior years. Interesting puzzle.

Working on a client with multiple filing issues. Some years unfiled, some filed with income omitted, one actually filed correctly. None of the returns are complex, and the Wage and Income transcripts appear to be complete.

This dates back to 2014. In that year, spouse 1 had w2 income and spouse 2 had a 1099R and social security. The IRS prepared a substitute return for spouse 1 in 2019, but not spouse 2. Tax was assessed at single rate, standard deduction, and one dependent. The IRS rep I spoke to on the Practitioner Priority line confirmed that.

Later refunds were intercepted and applied to the balance due.

Can an original return still be filed for that year? If the intercepted refunds result in a credit balance, will that be refunded?

Being a packrat type, I still have the software to prepare the returns.

It depends upon when the tax was paid.

Under section 6511, the claim for refund must be filed within 3 years of the due date or 2 years from the time that the tax was paid, whichever is later, or if no return was filed, within 2 years of the from the time that the tax was paid.

3 years from the due date (4/15/2015) has expired. According to your facts, the tax was paid when later years’ refunds were intercepted and applied to the balance due. Each of these “interceptions” started the 2-year clock running.

I think there might be a slightly different answer. First, under Sec 6511 a refund claim must be filed within 3 years of the date the return was filed, not within 3 years of the due date of the return. Also the Court has ruled (Healer v Comm) and the IRS agrees that if a Substitute for Return (SFR) is filed by the IRS, that SFR is not a "return" filed by the taxpayer for purposes of Sec 6511. The 3-year statute would begin if and when the taxpayer actually files a return.

In addition, 6511(b)(2) provides that if refund claim is timely filed, the amount that can be refunded is limited to the tax paid within the 3 years immediately preceding the filing of the claim ("lookback period").

So if a refund claim is filed today in the form of an original return, that should be a timely-filed claim. And if the intercepted tax payments were, say, 2 1/2 years ago, those payments should be eligible for refund because they fall within the 3-year lookback period, even though beyond the alternate 2-year period mentioned.

marknyc, I disagree. Section 6511(a), regarding when the claim must be filed, states this:

(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.

So, since the 2014 return wasn’t filed, the claim (in the original return) must be filed within 2 years from the time that the tax was paid in order to be timely.

My understanding of the OP is that the taxpayer will be filing an actual tax return, which should serve as both an original tax return and a refund claim, so the refund claim will be the overpayment on a return that was filed, making the "if no return was filed" provision not applicable?

It's a little difficult to resolve this with insufficient facts.

taxcpa, can you tell us the dates and amounts of the tax payments and the refund that your client wants to claim?

So, since the 2014 return wasn’t filed, the claim (in the original return) must be filed within 2 years from the time that the tax was paid in order to be timely.

The requirement that the 2014 return be timely filed in order to avail oneself of the 3 year time limit was removed by Technical Amendments Act of 1958, Pub.L. No. 85-866, § 82(a).

In Rev. Rul. 76-511, 1976-2 C.B. 428 the IRS said

During the calendar year 1972, A's employer withheld Federal income tax from A's wages. On April 30, 1976, A filed a 1972 Federal income tax return showing an overpayment of tax. A indicated on the return that the overpayment was to be refunded. A had not requested an extension of time for filing the return....

In this case, A filed a claim for refund within the 3-year period of limitation prescribed by section 6511(a) of the Code, because, under section 301.6402-3 of the regulations, A's 1972 income tax return was a claim for refund.

In Weisbart v. U. S. Dept. of Treasury, 222 F.3d 93 (2d Cir. 2000):

Congress leveled the playing field in 1958, by jettisoning the requirement that a return had to be filed on time as a prerequisite to recovering a refund in the ensuing 3 years.   See id.   As a result, contrary to the Miller court's holding, a timely filed return is no longer required in order to satisfy the 3-year deadline of section 6511(a)....

Indeed, so read, section 6511(a) would allow “a taxpayer to file a tax return 40 years late and still have 3 additional years in which to file a claim for refund.”   Id. (internal quotation marks and citation omitted).   Admittedly, this is counter-intuitive.   Nevertheless, this construction makes sense:  a central aim of section 6511(a) is not to bar stale refund claims, but to ensure that a taxpayer give the IRS notice of such claims before suing in federal court.

It is considered to be a matter of settled law that the Sec 6511(a) three-year time limit starts running from when the return is filed even if the return is late. What bars a refund from being issued 40 years late is the "lookback period" in Sec 6511(b)(2)(A).

Usually, a non-filer, has not filed any returns from year XXXX.

There is a policy (See also IRM 1.2.1.6.18.) of filing the 6 most recent years. Let's pretend a taxpayer has not filed any returns since 2016.

The taxpayer needs to look to 2023 2022 2021 2020 2019 2018 and be timely on the 2024 return. If you have a balances due on any of these 6 years, taxpayer is responsible. The only years open for receiving refunds, would be 2021 2022 2023.
2021 needs to be filed by 04/15/2025 to obtain the refund.

OP - Get money up front. I don't care if it's a lump sum or each year is paid before the next return is filed. Start with 2018, easier to complete the returns this way. You got the proforma, 2210 issues, carryovers, etc.

2019 - You will file returns for 2019. OP needs talk to client(s) about single or married for all years.

For the moment, lets confine the discussion to 2014, as its the only year the IRS has prepared a substitute return. There are other unfiled years, but no action has been taken.

For 2014, it appears that filing a correct return will yield a tax of about $2K less than the assessment. That should also result in a reduction in the penalties and interest assessed. The last later year refund that was reallocated was in late November 2022, according to the transcript.

Got to love a good mess, eh?

The last later year refund that was reallocated was in late November 2022, according to the transcript.

It would be nice if you were more precise and would answer my questions. For the refund that was intercepted in November 2022, when was the tax paid? Was this, for example, a 2021 return where the tax was paid through withholding on 4/15/2022, filed on 10/15/2022? If so, it might be too late to get the refund.

Like I said, it's difficult to apply the rules of sec. 6511 without detailed facts.

OK, to be more precise.

21 return was filed 9-16-22, with a refund generated from withholding tax. No estimates involved. Additional child credit was paid in advance during 2021, so no issue there. Refund transfer to the 2014 year was effective 4-15-22, per the transcript. That puts it outside the 2 year window, I would think.

So the question remains: If an original 2014 tax return/refund claim is filed next week showing an overpayment, is the 2014 tax paid on 4/15/22 eligible to be refunded due to the 3-year lookback period of 6511(b)(2)(A) or is it ineligible for refund due to the 2-year lookback period of 6511(b)(2)(B)? I would think the 3-year period applies.

So the question remains: If an original 2014 tax return/refund claim is filed next week showing an overpayment, is the 2014 tax paid on 4/15/22 eligible to be refunded due to the 3-year lookback period of 6511(b)(2)(A) or is it ineligible for refund due to the 2-year lookback period of 6511(b)(2)(B)? I would think the 3-year period applies.

I still disagree. Since the IRS issued a notice of deficiency, the 2-year lookback period of section 6511(b)(2)(B) applies. See Miller v. United States, 38 F.3d 473 (9th Cir. 1994). https://casetext.com/case/miller-v-us-23

Edit: See #15 below.

So the question remains: If an original 2014 tax return/refund claim is filed next week showing an overpayment, is the 2014 tax paid on 4/15/22 eligible to be refunded due to the 3-year lookback period of 6511(b)(2)(A) or is it ineligible for refund due to the 2-year lookback period of 6511(b)(2)(B)? I would think the 3-year period applies.

I still disagree. Since the IRS issued a notice of deficiency, the 2-year lookback period of section 6511(b)(2)(B) applies. See Miller v. United States, 38 F.3d 473 (9th Cir. 1994). https://casetext.com/case/miller-v-us-23

The Miller decision was in 1994. In the 2000 Weisbart vs US Treasury case, the Court disagreed with the Miller decision and concluded that a late-filed original return showing an overpayment constitutes a valid refund claim and that the 3-year lookback period should apply.

https://www.casemine.com/judgement/us/5 ... 493478fdd7

Okay, I yield because of two cases that I just found.

The case of Wolffing v. United States, No. 19-52T (Fed.Cl. 2019) is a long opinion, but if you slog through the facts and the look at the portion of the opinion that deals with the 2014 year (page 18), you will see that the court applied the 3-year lookback period of section 6511(b)(2).

https://ecf.cofc.uscourts.gov/cgi-bin/show_public_doc?2019cv0052-19-0

This case involved many years of returns (1997 to 2009, 2011 to 2014) with substitute for returns filed, notices of deficiency issued for years 1997 to 2009 and 2011. The taxpayer filed a 2014 return on 10/11/2017 and the tax was fully paid through withholding. The $2,076 refund shown on the return was applied to the 2005 year where assessments were outstanding. The court said that it didn’t have jurisdiction to determine a refund for the 2005 year, but it said she must get the refund by filing a claim for 2005.

A similar case is Voulgaris v. United States, No. 17-13129 (E.D. Mich. 2018). The case involved the 2003 year. The IRS filed a substitute for return and issued a notice of deficiency on 9/2/2008. No petition was filed with the Tax Court, and the IRS assessed the amounts in the notice. On 2/28/2010, the assessment was partially paid via a levy. The taxpayer filed the 2003 return on 8/19/2015 claiming a refund. The court ruled that although the claim was timely under section 6511(a), the refund was outside of the 3-year lookback period, which was 8/19/2012 to 8/19/2015.

https://casetext.com/case/voulgaris-v-us-dept-of-treasury-internal-revenue-serv

In the instant case, a timely return wasn’t filed for 2014. The IRS issued a substitute for return, issued a notice of deficiency, and assessed the amounts in the notice after no petition was filed with the Tax Court. The question is whether the refund from the 2021 return that was filed on 9/16/2022 and intercepted and applied to 2014 is refundable.

I agree that the 3-year lookback period applies both for section 6511(a) and 6511(b). A claim in a 2014 return that is filed now (November 2024) will be considered timely under both sections since under the 3-year rule, the refund claim must be filed by 9/16/2025.

My point here is that I needed to find some court cases where the taxpayer did not file the return on time, the IRS issued a notice of deficiency that got assessed, the taxpayer made payments towards the assessment, then filed the return claiming a refund of the payments made. I found two cases that addressed this.

In both of these cases, the court used the 3-year “lookback” rule of both sections 6511(a) and 6511(b)(2) in deciding whether there were payments made during that period that were refundable.

In the Wolffing case, a 2014 return was filed 10/11/2017. The 3-year “lookback” period was 10/11/2014 to 10/11/2017. No tax payments were made in that period (the tax withheld was paid 4/15/2015), so no refund was allowable. The tax was paid by withholding on 4/15/2015, and the refund was applied to the 2005 year, so the refund would have been allowable had the taxpayer filed a claim for the 2005 year.

In the Voulgaris case, a 2003 return was filed 9/19/2015. The 3-year “lookback” period was 9/19/2012 to 9/19/2015. No tax payments were made in that period (the payment was made by levy on 2/28/2010), so no refund was allowable.

These cases demonstrate that the 3-year “lookback” period extends 3 years back from the date that the return was filed. In the instant case, let’s say that the 2014 return is filed 11/15/2024. The tax was paid from withholding on 4/15/2022 (the due date of the 2021 return). The 3-year “lookback” period would be 11/15/2021 to 11/15/2024, and since the payment was made on 4/15/2022, it is within this period and is refundable.

Thank you all. Very informative answers.

If one steps back and wears a layperson hat instead of tax pro, reading this thread highlights how needlessly complex and arcane even some simple aspects of our tax system are. I mean, what kind of system requires people with IRS experience, multiple credentials, and decades of experience to come first to one conclusion and then change to a different one, after spending probably hours on researching court opinions about which most citizens have zero clues.

If one steps back and wears a layperson hat instead of tax pro, reading this thread highlights how needlessly complex and arcane even some simple aspects of our tax system are. I mean, what kind of system requires people with IRS experience, multiple credentials, and decades of experience to come first to one conclusion and then change to a different one, after spending probably hours on researching court opinions about which most citizens have zero clues.

What system? Pretty much every system. Separate tax codes aren't written for every person and their specific facts and circumstances.