In any situation in which new rules might apply, it’s possible to get caught up in the dry details of the law and overlook the fact that they affect real people facing real-life difficulties. This might be especially true in the world of tax. An example of this is an email we recently received from a taxpayer facing the loss of her tax refund in the midst of a nationwide pandemic. With the names omitted, here’s her correspondence:
“I have a payment plan with the IRS, for back taxes due when my husband died. Each year the IRS keeps my refund; will that still happen during the pandemic?” she wrote. “I just got out of the hospital with double pneumonia and blood clots. It would be nice if I could get my refund but I understand it may not be feasible.”
We referred her question to Robbin Caruso, partner and co-chair of the National Tax Controversy Practice at Top 100 Firm Prager Metis CPAs.
“Unfortunately, any overpayments will be applied to prior-year taxes,” Caruso replied. “There are no provisions in the recent relief issued to date that enable a tax refund (overpayment) on a currently filed return to be issued where there are prior-year taxes due.”
This is the case even for a taxpayer in an installment agreement, Caruso noted, but added, “If she is not in some sort of payment arrangement, then I would recommend that she reach out to get into one (it potentially reduces penalties, etc.) — there are many options to consider and some may better meet her needs than others.”
“I would also recommend that she project her taxes for 2020 and future years to avoid having significant overpayments, until the back taxes are caught up,” Caruso continued.
The good news, she said, is that if the taxpayer otherwise qualifies for the Economic Stimulus Payment, she’ll get it, as the IRS is not holding those against prior-year tax liabilities.
Finally, Caruso noted that the IRS has a 10-year statute of limitations on collections from the date that tax is assessed, so that it must stop collections efforts at the end of that period. “It is called the Collection Statute Expiration Date,” she said. “There are some actions that cause this date to be suspended and this will cause the CSED to be extended. This generally happens when the ability of the IRS to engage in collection activity is barred, such as when a person is in a bankruptcy where there is an automatic stay. Other examples of actions that cause suspensions include (but are not limited to) the period while the IRS is considering/addressing a request for an installment agreement, an offer in compromise, or an innocent spouse relief request.”
“The specific circumstances of each taxpayer vary and these differences are often very important in determining which option is best for the taxpayer when establishing a plan of action,” Caruso concluded.
