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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law

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overpaid, overpayment of taxes, Chicago Tax AttorneysOn our website and blog, we’ve discussed extensively the various scenarios for underpayment of taxes, tax audits, tax court litigation, etc. But what happens when you pay too much in taxes? This happens a lot more than most people recognize, and consequently, many taxpayers do not realize their overpayment until it’s too late.

Won’t the IRS Just Refund My Overpaid Taxes?

Like most dealings with the IRS, the answer to this question is…it depends. The key is if the IRS is aware of the overpayment. For example, if you file a tax return that shows you owing $1000 and you accidentally mail in a check for $1500, the IRS will probably (though there is no guarantee) catch the mistake and refund you the $500 overage. The far more common scenario, however, is an overpayment that the IRS is not aware of. Common examples that fall into this category include failure to claim a credit or deduction you are entitled to (such as the Earned Income Tax Credit or home mortgage deduction) or in the case of a business filer who was entitled to carry a net operating loss from a prior year. There are also cases in which a taxpayer overpays as a result of an audit examination.

Filing a Claim for Refund

In the vast majority of cases, there are two ways to file a refund claim when you overpay your taxes.  In many instances, you may be able to file an amended return for the tax year in question to correct the error and claim your overpayment. The other method is to file Form 843 Claim for Refund and Request for Abatement. When filing this form, it is important to clearly state the specific reason(s) for the refund claim. In certain limited circumstances, you may also choose to file an "informal" Claim for Refund – this is just a letter to the IRS claiming an overpayment of a particular amount for a specific reason. This method is seldom used, and you should only choose this option with the assistance of a skilled tax attorney. Whatever method you select to claim your refund for overpaid taxes, it is best to take action sooner rather than later; unless there are extenuating circumstances, the statute of limitations for filing a refund claim is within three years of the date of filing the return or two years of the date the overpayment was made, whichever is later.  Its actually a bit more complicated than just that, though, because you can only claim an overpayment of monies that were paid within the prior two years.  One more thing to be careful of is filing a claim for an excessive or unjustified amount. Because of the high number of frivolous claims, Congress has given the IRS the authority to levy a penalty equal to 20% of the amount of the claim.

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litigation hazard, tax appeals, Chicago Tax Attorneys"A fair and impartial resolution is one which reflects on an issue-by-issue basis the probable result in event of litigation, or one which reflects mutual concessions for the purpose of settlement based on relative strength of the opposing positions where there is substantial uncertainty of the result in event of litigation." - Internal Revenue Manual section 8.6.1.3(2). When you've sent a Letter of Appeal to the IRS asking for an administrative review of a decision that was made by the Examination function regarding your tax dispute, the IRS assigns an Appeals Officer to determine of there is a possibility for settling the issue. The mission of the Appeals Officer is to resolve your case in a way that:

  • Avoids litigation;
  • Is "fair and impartial";
  • Will encourage voluntary compliance;
  • Represents the integrity and efficiency of the IRS.

Because the Appeals Officer's mission explicitly includes the objective of avoiding litigation, they'll generally begin the discussion by going over the various ways in which you could settle out-of-court by reaching a compromise that fully embraces any hazards to the government of litigating the issue.

Hazards of Litigation Defined 

What the Appeals Officer is actually determining is a quantitative analysis of:

  • The likelihood that, if the case goes to Tax Court on the liability issues, what are the chances the government will prevail, and what are the chances that the taxpayer will prevail.
  • The cost of litigation to the government is simply not an issue.

Application of the Hazards of Litigation Standard

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