Hi XXXXXXX
Thank you for using justanswer. I would take a copy of all 3 tax returns (2005, 2006, and 2007 if its been filed) to the conference showing the carried over refund was still available to pay the tax due. I personally would also create a 1040x for 2005 showing that the carried over refund would have paid his 2005 tax liability in full had he filed correctly. This would just be back up documentation though. I would also make the point that IRS has had possession of this money the whole time, which is a fairly strong point for your client, and I would use that as a starting point to negotiate away any penalties/interest they might want to charge. In the end, it will be up to the individual auditor as to how far this will go, but I would start there, which makes it their move. You may or may not need to counter their ruling.
Master Tax Preparer
Enrolled Agent with 20 Years Experience specializing Individual and Small Businesses
Hi again XXXXXXX
Was this refund due to a net operating loss? What you're describing to me sounds like the terms of a net operating loss....
I think I might try the Taxpayer Advocate Service to see what they might recommend. I would ask them if IRS is going to play "hardball" then would amending the 2006 tax return and ask that the refund NOT be applied to 2007 taxes, but be refunded to the taxpayer instead, help with any penalties/interest, since it would cut a year off the time he underpaid. Like you, I think I would want to look at all of my options before I met with the IRS , and the taxpayer advocate service is a wonderful resource.
I have "opted out" of this question to open it back up to all of the tax pros out there ....I'm sure somebody has some good ideas for you. This is a very talented group of people, who research these questions, and give people some terrific answers/
Best of luck with your situation. This is a very interesting case, & I would really like to know how it comes out.
ok...I think we've been looking at this from the wrong angle.
2005 is still an open year. You have to amend 2005 to correct his income. He still paid the $10,000 in 2005, so you're not asking the IRS to carry anything back. You're asking the IRS to apply the correct amount of estimated tax that was already paid to the correct year. You will of course have to amend the carryover (if any is left) to 2006 by filing a 2006 1040X and if he filed a 2007, you may have to amend that also to adjust the carryover (if any) of the estimated tax that is now no longer "estimated tax" since it now became "paid tax liability".
This would be my position and I would have all the amendments in hand.
I hope this helps you
Hopefully you saw my answer above re: looking at this from a differenct perspective.
I did bring up this situation with the person in our district that goes on the audits and she agreed with my answer re: amending 2005 and applying the money he paid to his 2005 return, and then amending 2006 to show the correct amount ( if any) of carried over estimated payment, and to also amend 2007 if that one has been filed. Our contention is that this is not a carryback, and that term is probably the culprit. Please read my above post. If you still have questions, I'll check back as I can. Best of luck to you