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I know that if an individual has a refund and files a late

return, the refund is lost...
I know that if an individual has a refund and files a late return, the refund is lost if the filing is over 3 years. The IRS will week the refund (claim a credit) against the taxpayer for the lost refund. But, what happens if the taxpayer subsequently amends the late filed return within 3 years of the late filing and computes a higher tax. Can the IRS keep the previous credit and require the taxpayer to pay again (the increase of tax), effectively denying the taxpayer the full use of all payments and withholdings that previously occurred over time?
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Answered in 6 minutes by:
6/19/2013
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Verified

MyVirtualCPA :

Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

MyVirtualCPA :

I am truly sorry to report, but when you forfeit a refund because of a late filing, that money is lost forever

MyVirtualCPA :

So, if you do have an amended return on the late filing, the IRS could have you pay again.

MyVirtualCPA :

I am truly sorry if this is not the news you had hoped to hear.

Customer:

Not for me. Trying to help an estate of a friend. He was so fearful of the IRS, he did not file for 10 years, so to settle the estate we filed 10 years worth of returns. I wonder if there is a mental status and inability to file that would allow us to go beyond the three (3) years. When we filed on behalf of the estate, we claimed the basic itemized deductions and eliminated the balance due, penalties and interest computed by the IRS when they filed "substitute" returns. As a result, he ended up with refunds for almost every year. Unfortunately, we filed him with a "single" status as the family and his friends knew him to be single, but after filing and digging through the estate, we found he was legally "married" in France and never divorced. Therefore, to protect the executor of the estate who signed the late returns, we decided amend using "Married Filing Separately" which obviously increased the tax. The IRS kept the prior refunds (credits) and now asking to pay again with penalties and interest.

MyVirtualCPA :

So you did not get the original returns in within the original 3 year window, but you got them within 3 years of the return

Customer:

Nope. We filed after 3 years, but amended within 2 years of filing the late returns.

MyVirtualCPA :

Unfortunately you lose those refunds forever and they become "excess collections" which cannot be applied to reduce any tax...

Customer:

I should say yes. We filed the late returns after 3 years of the original due date.

MyVirtualCPA :

But you did not get the returns filed in time to get a refund.

Customer:

Nope, so they posted a credit in his tax transcript and kept the refund. The 1040X that computes a change (increase) in tax is now causing a balance due even though the refund(credit) is greater than the change in tax.

MyVirtualCPA :

That refund has become an "excess collection" and is lost forever

MyVirtualCPA :

But, what you can do is try to write the IRS a letter, explaining the situation and how you were originally due a refund, but then you lost them because of your late filing and you would like to have those refunds applied to the current year tax, since withholding was paid for those years. However, they could deny this request

Customer:

OK. Is there a mental incapacity that breaks through the 3-year wall (fear of the IRS). He actually committed suicide over in fear of all the IRS notices and garnishments that were occurring. Very sad case.

MyVirtualCPA :

That is very sad. I'm sorry to hear that, but unfortunately there is no such statute.

MyVirtualCPA :

If there was, everyone would be using it.

Customer:

I know physically disability allows for refunds past the 3 year mark. I will look for an exception for mental disability.

Customer:

Thanks.

MyVirtualCPA :

You're welcome.

MyVirtualCPA :

Do you need anything additional?

Customer:

Nope.

MyVirtualCPA :

If you would, please rate my response as "excellent" so that I may receive credit for assisting you today

Customer:

Excellent.

MyVirtualCPA :

Please use the rating feature at the bottom of your screen, and select three smileys or stars

Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Verified
Megan C and 87 other Tax Specialists are ready to help you
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Megan C
Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 16,592
16,592 Satisfied Customers
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level

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