In yesterday’s post, Keith discussed the latest Maehr case and how the IRS ability to collect is unaffected by the collection statute of limitations in situations when it levies on the Social Security payment prior to the expiration of the statute of limitations. In today’s post I discuss a recent IRS Program Management Technical Assistance that considers when a taxpayer who may have been subject to levy has in fact overpaid their tax liability. In particular, the PMTA discusses how a taxpayer may be entitled to receive a refund when the automatic levies continue even though the liability is extinguished.
First, some context. The PMTA addresses taxpayers where the IRS is receiving state tax refunds pursuant to the IRS’s Automated Levy Programs (ALP). As the IRM notes, that “program matches federal tax debts with state taxing authorities, municipal taxing authorities and federal agencies disbursing funds, such as, salary, pension, and vendor payments.” While the PMTA addresses the IRS’s tapping of state refunds through the State Income Tax Program, the largest of the ALPs is the Federal Payment Levy Program (FPLP) that the IRS has implemented with Treasury’s Bureau of the Fiscal Service (BFS). The FPLP allows the IRS to issue continuous levies on certain federal payments, including Social Security benefits.
The PMTA flags how the IRS will continue to receive some payments pursuant to ALPs even after the account is fully paid. That makes sense, as there may be a lag between full satisfaction of the debt and IRS notifying BFS that the account should no longer be subject to the FPLP.
When there is a lag and payments continue to flow, the taxpayer may not know that as a result of the lag that they have an overpayment. The PMTA involves a situation when the IRS has discovered the overpayment and the taxpayer has not filed a refund claim.
As the PMTA discusses, the IRS is not authorized to issue a refund if it would otherwise be barred under the SOL and lookback rules in Section 6511
While the PMTA does not provide the years in question, these accounts typically are pretty old. The main limit on a taxpayer’s ability to receive a refund in these situations is the lookback rule of 6511(b)(2)(b). That provides that if a claim for credit or refund is not filed within three years of the filing of the return, the taxpayer is entitled to a refund of only those taxes paid during the two years immediately preceding the filing of the claim. (As an aside, my colleague Marilyn Ames, has worked with me in completely revising the content on refund claims and the at times tricky SOL/lookback issues in Chapter 11 of Saltzman and Book, IRS Practice and Procedure).
As the PMTA notes, the IRS itself can refund the overpayment even in the absence of the taxpayer filing a claim. The IRS, however, is limited to refunding an amount paid within the applicable look-back period, as per 6511(b)(2)(C). For these purposes, the credit is deemed allowed when the IRS schedules the overassessment, as provided in Section 6407.
The PMTA raises some questions. Given that taxpayers in the FPLP may not be in a position to know if they have in fact overpaid, I am not sure if the IRS notifies the taxpayer of the positive account balance or otherwise systematically reviews the account for the automatic issuance of a refund. To be sure, the refund is dependent on that amount not being subject to offset for a different tax liability or other offsettable liability. And that the IRS can issue the refund in the absence of a refund claim does not alter the need for a timely and properly filed claim if a taxpayer seeks to bring a refund suit, as a refund claim is a jurisdictional requirement for most suits.
Completing and filing a refund claim via a 1040X can be burdensome, though IRS now allows for e-filing of 1040Xs (starting with the 2019 year). For now, that requires purchasing software or working with a commercial preparer; one hopes that post Inflation Reduction Act the IRS will provide direct access through its website for the e-filing of amended (and original) returns, but that is a topic for a future post.