Error in tax liability estimate does not void extension request or bar refund

The Court of Federal Claims held that a married couple’s incorrect estimate of total tax liability on Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, did not invalidate their request for an automatic six-month extension and that they were entitled to a refund of their 2016 overpayment. The court found that while the taxpayers made a technical error in reporting net rather than gross tax liability, they correctly estimated that they would owe nothing further for 2016, and the error was not unreasonable enough to void the extension.

Facts: In April 2017, Selwyn Karp and Barbara Adams-Karp filed a Form 4868 requesting an automatic six-month extension to file their 2016 federal income tax return. On line 4 of the form, which requires an “estimate of total tax liability” for the tax year in question, the Karps reported $0. Their actual gross tax liability for 2016 was $131,201. However, they reported a balance due of zero because of tax payments they made in 2016 and an overpayment carried forward from a prior year that together far exceeded their gross liability. Overpayments were not unusual for the Karps; they also had them for 2013, 2014, and 2015, each year applying the overpayment to the following tax year instead of receiving a refund.

In October 2020, the Karps filed their 2016 tax return reporting an overpayment of $336,558 and requested that the overpayment be credited to their 2017 taxes. The IRS initially disallowed the request to apply the overpayment to 2017, claiming the return had not been received until April 2, 2021 — months past the Oct. 15, 2020, deadline. The Karps provided documentation showing the return had been marked as received on Oct. 15, 2020. The Karps filed a refund suit in the Court of Federal Claims. While the case was pending, the IRS changed its position and agreed that the Karps had timely filed their 2016 return, mailed them a refund check for $154,720, and credited a portion of the 2016 overpayment to the taxes the Karps owed for 2022.

After issuing the refund and credit, however, the IRS reversed course and determined that the Karps’ Form 4868 had reported an unreasonable estimate of total tax liability, rendering the extension void, the return untimely, and the refund disallowed. The IRS therefore removed the credit to the Karps’ 2022 taxes and sought a return of the refund check it had previously issued them.

The IRS moved for summary judgment in the case, and the Karps filed a cross-motion for summary judgment.

Issues: The parties disputed whether the Karps’ request for an automatic six-month extension of time to file their 2016 federal tax return was valid and whether they were entitled to a refund for that year. The IRS argued that the Karps failed to make a reasonable estimate of their 2016 liability, invalidating their extension request and rendering their tax return filing untimely. The Karps argued that their estimate was reasonable, that their filing was therefore timely, and that they were entitled to a refund of the extra money they paid above their tax liability for 2016.

Quoting Crocker, 92 T.C. 899, 907 (1989), the Court of Federal Claims stated that “a taxpayer should be treated as having ‘properly estimated’ his tax liability, within [the tax regulations’ meaning], when he makes a bona fide and reasonable estimate of his tax liability based on the information available to him at the time he makes his request for extension.” As the court explained, the Karps’ 2016 Form 4868 listed zero tax liability on line 4 of the form, $511,788 as the tax they had already paid for the year on line 5, and a balance of zero tax due on line 6. The estimate of zero tax liability on line 4 was incorrect, assuming the line requests gross, rather than net, tax liability. The court found that, nonetheless, given the information available to them about their substantial overpayments from earlier years and their estimated payment from June 2016, this was a reasonable estimate of their net tax liability, as their tax payments more than covered their tax liability. Thus, while the Karps made a technical error in estimating net rather than gross tax liability, they correctly estimated that they would owe zero, and the technical error was not unreasonable enough to make the automatic extension void.

As the Court of Federal Claims noted, courts have considered the validity of a Form 4868 where the taxpayer understated the additional tax due. In Crocker and a similar case, Clayton, 102 T.C. 632 (1994), the Tax Court had held that the taxpayers’ Forms 4868 were invalid because they had underestimated their tax liability. In both cases, the taxpayers’ underestimates resulted in their underpaying their taxes, which delayed the government’s receipt of the money it was owed.

However, the Court of Federal Claims pointed out that the IRS had admitted that it was not aware of any cases in which it denied an automatic extension to a taxpayer who underestimated his or her tax liability but paid the IRS more than it was owed. The court stated that this was because “the statute and Treasury regulations are designed primarily to ensure that the government timely receives the money it is due, rather than ensuring that the government receives all tax returns by a particular date…. Thus, the IRS should not ordinarily withhold the so-called automatic extension because of technical errors that do not result in a delay in the government’s receiving money.” In the Karps’ case, their technical error on their extension form “did not leave the government short on what it was owed,” so the court concluded it did not invalidate the extension.

The IRS also argued that when the Karps filed their 2016 Form 4868, they had not yet paid their 2016 taxes because the money had not yet been carried over from 2015, so their estimate was unreasonable. The court found that because the Karps had historically elected to carry forward their overpayments, once they did so for 2015, they could count the carried forward overpayment as a payment toward their 2016 taxes. Thus, once the Karps filed their 2015 tax return, their estimate that they would owe zero for 2016 was correct.

The IRS also raised the case FleetBoston Financial Corp., 483 F.3d 1345 (Fed. Cir. 2007). In FleetBoston, the taxpayer had underpayments for two years and sought to reduce its deficiency interest for those years by applying overpayments it had elected to apply to other tax years. The Federal Circuit held that the taxpayer could not elect to apply an overpayment to one tax year and then later have that overpayment applied to offset a tax deficiency for a different year. The IRS argued that, as in FleetBoston, the Karps had no overpayment assigned to 2016 when they filed their Form 4868 because they had not yet filed a 2015 tax return assigning the 2015 overpayment to 2016.

The Court of Federal Claims noted, however, that when the Karps filed their 2015 tax return, they did elect to carry over the overpayment to tax year 2016, as was reflected in their Form 4868, and the payment was deemed made for 2016 as of April 15, 2017. Moreover, unlike the taxpayer in FleetBoston, the Karps had no underpayment in some other year for which they owed money when they filed their 2016 return. Thus, the court concluded that it was reasonable for them to account for their expected carryover when they filed their 2016 Form 4868.

The court further pointed to alternative methods of requesting an automatic extension that have been available since 2014, including online payment, which requires no estimate of tax liability at all. The court held that “[i]t would be unreasonable for the Karps to be penalized only because they chose an older method of payment that still includes a line requesting their estimate of their total tax liability.” To hold the Karps to a higher standard based on their choice of extension method would set a “trap for the unwary taxpayer,” an outcome the court noted “[t]he law disfavors.”

Finally, the court observed that, initially, the IRS thought the Karps’ estimate of tax liability on their Form 4868 was reasonable and that the IRS had enough information to know that their account carried an overpayment rather than an underpayment. In the court’s view, the IRS’s actions before the Karps filed suit indicated that it was not concerned about the Karps’ estimate of their gross tax liability.

Holding: The court granted the Karps’ cross-motion for summary judgment and denied the government’s motion for summary judgment. The court held that the Karps provided a reasonable estimate on their Form 4868 requesting an automatic extension of time to file for 2016, so they should have received the six-month extension to file their 2016 taxes. Thus, they were entitled to a refund of their tax overpayment for the 2016 tax year.

• Karp, No. 1:23-cv-00926 (Fed. Cl. 5/21/26)

— John McKinley, CPA, CGMA, J.D., LL.M., and Thomas Godwin, CPA, CGMA, Ph.D., are both professors of the practice in accounting and taxation in the SC Johnson College of Business, and Jack Horner is a graduate of the Dyson School of Applied Economics and Management in the SC Johnson College of Business, all at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.