One of the most-often-asked questions by taxpayers is, "When will I get my refund?" While in most cases people realize their refund will come a few weeks after the return has been filed, some aspects of filing for and getting refunds and/or credits are not so intuitive. Taxpayers may discover an error on their return that causes an overpayment. And while many overpayments are conceded by the IRS and credited or refunded automatically, at other times, the taxpayer must file a claim for credit or refund.
Sec. 6511(a) and Regs. Sec. 301.6511(a)-1(a) provide three years from the date of filing the tax return to claim a credit or refund, or two years from the date the tax was paid, whichever is later. For purposes of the limitation, a return filed or tax paid before the last day prescribed for its filing or payment (without regard to extensions) is considered filed or paid on that last day (Sec. 6513(a)).
If no return is filed, Regs. Sec. 301.6511(a)-1(a)(2) provides the taxpayer must file the claim for credit or refund of an overpayment within two years from the time the tax was paid. For example, when a taxpayer has a temporary job and does not earn enough income to have a tax return filing requirement but has had income taxes withheld, if the taxpayer elects not to file a tax return for that year, he or she must file a claim for a refund within two years of the date the return would have been due.
In addition to this time limitation, Sec. 6511(b)(2) and Regs. Sec. 301.6511(b)-1(b) limit the amount of the credit or refund that a taxpayer can claim. If a taxpayer files a return and makes a claim for refund or credit within the three-year time limit, the refund or credit amount is limited to the tax paid within three years, plus the period of any extension of time for filing the return, immediately preceding the time the claim was filed. If a taxpayer filed a return and makes a claim for refund or credit after the three-year time limit, the refund or credit amount is limited to the tax paid within the two years immediately preceding the filing of the claim.
There are exceptions to the three- or two-year statute of limitation. The statute may be suspended during periods in which individual taxpayers are unable to manage their financial affairs due to physical or mental impairments. This is known as being financially disabled. An individual will not be treated as financially disabled during a period in which the individual's spouse or any other person is authorized to act in financial matters on his or her behalf. To qualify for financial disability, the taxpayer has to provide proof of the impairment in the form and manner prescribed by Rev. Proc. 99-21 and other applicable guidance.
Another exception to the three- or two-year statute of limitation on refunds and credits is the seven-year period applicable under Sec. 6511(d)(1), to the extent the claim relates to an overpayment on account of a deduction for a bad debt or a loss from a worthless security, or the effect that the deductibility of such debt or loss has on the application to the taxpayer of a carryover.
For a detailed discussion of the issues in this area, see "Tax Clinic: Time Limits on Refunds and Credits," in the November 2017 issue of The Tax Adviser.
—Jackie Fountain, CPA
The Tax Adviser is the AICPA's monthly journal of tax planning, trends, and techniques.
Also in the November issue:
- An analysis of income inclusions under Sec. 956.
- Part 2 of a discussion of foreign estate and trust distributions to U.S. beneficiaries.
- A look at practitioner standards for tax return positions vs. tax return preparation.
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