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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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installment, IRS, Illinois Tax Law AttorneysMany people, for fairly obvious reasons, are simply unable to pay the IRS everything they owe in one lump sum and need another tax relief option. It's just not reasonable to expect someone to pay tens of thousands of dollars at once; even Wall Street tycoons don't normally keep that much cash sitting around. So the IRS offers the option of monthly payments, or "installment agreements" as a way of repaying your tax debt over time.

There are basically three variations on the IRS installment concept: Guaranteed, Streamlined and Discretionary agreements.

Guaranteed Installment Agreements: The Easiest Option

If you don't owe the IRS too much, and you can make a reasonable monthly payment, you probably qualify for a Guaranteed Installment Agreement. To qualify, all of the following must be true:

  • Your total IRS debt (not including penalties and interest) is less than $10,000;
  • The debt can be paid off in three years or less of equal monthly installments; and
  • You have no unfiled tax returns.

The big reason you want a Guaranteed agreement if you are eligible: you do not have to submit the invasive financial disclosure statement to the IRS. In addition, in most cases the IRS will not file a Notice of Federal tax lien on your assets. A tax lien can mess up your credit and have the IRS on your back for years to come, so you want to avoid this outcome if at all possible.

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OIC, Offer in Compromise, Chicago Tax LawyersAn Offer in Compromise (OIC) is essentially a proposal to the IRS asking them to accept less than what you owe. Along with the required OIC forms, you should also submit evidence demonstrating that your offer is the most the IRS can expect to collect from you within a reasonable amount of time. When you submit an OIC, there are three possible results:

  1. Acceptance: You win! They've decided your offer is reasonable given your circumstances. This is…let's just say…"pretty rare" unless you know exactly what you're doing. Historically, offer acceptance has hovered around the 10-20 percent rate;
  2. Rejection: You lose! They've decided your offer isn't good enough; or
  3. Return: You failed! There are a number of reasons you could get a return of your offer.

If Your Offer is Rejected

This seems like pretty bad news, and it's also by far the most common result of an Offer in Compromise. There was a short time recently when OICs seemed to be a bit easier to get through the system. However–due to recent budget cuts and internal policy considerations–the IRS is getting even more (and some would say cynically) "difficult" to convince.

Rejection of an offer comes two ways:

  1. The IRS concludes that there is a "full ability to pay"; or
  2. The IRS comes back with a counter-offer of a higher, acceptable amount to compromise the debt.

Is there a path forward from here if you disagree with either these alternatives? Absolutely; there is an internal appeals process in place. Within 30 days of getting the rejection notice, you can file an appeal in which you clarify precisely why the IRS should have accepted your OIC and what specific errors in analysis they made. We regularly help clients with filing appeals for both types of rejections.

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