Applying Tax Refunds: Benefits and Limitations
Applying tax refunds to future years can be beneficial if you find a deficiency in a prior tax return. However, the total amount of interest relief will not exceed one year, even if the refund was carried forward for multiple years. Here’s a detailed explanation:
Example Scenario
Imagine you overpaid $20,000 on your 2010 Form 1040, U.S. Individual Income Tax Return, and chose to apply this overpayment to 2011. If a mistake on the 2010 return results in a $20,000 deficiency, you cannot reverse the credit to pay this deficiency. Nonetheless, under Rev. Rul. 99-40, you may reduce the interest assessed by the IRS. Instead of accruing interest from the 2010 return’s due date, interest will begin after applying the credit to the 2011 estimated payments.
Determining Interest Accrual with Tax Refunds
To determine when interest starts accruing, analyze when the credit was applied. According to Rev. Rul. 99-40, the timing depends on your required estimated payments and when you made them. If your estimated payments for 2011 were sufficient, the deficiency interest would accrue from the 2011 return’s due date.
Interest Limitations
Rev. Rul. 99-40 won’t eliminate interest in all cases. For instance, if an overpayment rolls forward for several years, you may still owe interest. For example, if a 2009 overpayment applies to 2010 and 2011, but you discover a 2009 mistake in 2012, the IRS will only provide an interest-free period up to one year. Interest will accrue from April 15, 2011, until paid.
Requesting Interest Computation
IRS computers don’t compute interest using Rev. Rul. 99-40 automatically. You need to request this computation, either informally or formally using Form 843. If using the annualized or seasonal installment method for estimated tax payments, provide Form 2210 or 2220 showing when the credit was used (IRM §20.2.5.7.2).
If you have questions about applying tax refunds or need assistance with interest computations, contact us today.
