Posted by You could lose your ability to obtain a tax refund if you wait too long to file your federal income tax return. Here’s what you need to know.
Many people who know they will get a federal income tax refund delay filing their tax return, sometimes for many years. They believe that the money will always be there and that not filing the return on time is a way to preserve that money for future needs. As discussed below, waiting too long to file the return can result in losing the ability to obtain the refund. There are several special rules that apply. Very generally, a person will lose the ability to obtain a refund of taxes withheld from paychecks or taxes paid through quarterly estimated tax payments if the person files a return more than three years after the return is due. Read on for more details.
General Time Limit on Refund Claims
There is a limit on the amount of time you have to claim a tax refund. Generally, the limit is three years from the time you filed the return or two years from the time you paid the tax, whichever is later. Most commonly, a taxpayer claims a tax refund by filing a tax return for the year showing the taxpayer paid too much in tax and is due a refund. In other words, when you file a return that shows you are entitled to a tax refund, you are filing the return and the refund claim simultaneously. Therefore, even if you file the return late, you will always meet the requirement that the refund claim be filed within three years of filing the return. Nevertheless, filing the return late might prevent you from obtaining the refund.
Limit on Amount of Tax That Can Be Refunded
There is a second limit that restricts the amount of tax that can be refunded to you. When a taxpayer’s claim for refund is timely because the taxpayer filed it within three years of filing the return, the IRS is authorized to refund only the amount of tax paid within the three-year period ending on the date on which the taxpayer filed the claim for refund. For example, if a taxpayer files a claim for refund for 2016 on April 18, 2017, he or she can obtain a refund only of taxes paid for 2016 within the three-year period ending on April 18, 2017. We will see how this rule applies in a moment.
The Date on Which Tax Is Treated as Paid
Because of the limit on the amount of tax that can be refunded, a key question is when a taxpayer is considered to have paid tax for the year. The most common types of tax payments are made through taxes withheld from a taxpayer’s paycheck (in the case of employees) and through quarterly estimated tax payments by those who are self-employed. In both cases, the taxes withheld or paid are treated as if they were paid on the due date for that year’s return, i.e., the following April 15.
Let’s consider two examples.
Example 1
Suppose John worked as an employee during 2016 and had $5,000 of federal income tax withheld from his paychecks that year. John’s 2016 federal income tax return shows that his actual tax liability is only $3,500. Therefore, he is entitled to a refund of $1,500. Because of holidays, the due date for his 2016 tax return was April 18, 2017. Assume John filed his return on the due date. Is his refund claim timely? Yes. His return is his claim for refund. Because he filed his return and claim for refund at the same time, he meets the requirement that the refund claim be filed within three years of filing the return. Is John affected by the limit on the amount of tax recoverable? No. John can obtain a refund of taxes paid for 2016 within the three-year period ending on April 18, 2017, the date on which he filed his refund claim. John is treated as having paid the $5,000 of taxes withheld from his paychecks on the April 18, 2017, the due date of the return. Therefore, all of the $1,500 of tax for which he is claiming a refund was paid within the three-year period ending on the date he filed his refund claim. He can obtain a refund of the entire $1,500.
Example 2
As a second example, let’s assume the same facts, except that John delays filing his 2016 return. He knows he is entitled to a refund and decides that waiting to file his return is a way to put that money aside for later. Let’s assume he files his return on June 1, 2020. Is his refund claim timely? Yes. As in the prior example, he filed his return and claim for refund at the same time and therefore meets the requirement that the refund claim be filed within three years of filing the return. Is John affected by the limit on the amount of tax recoverable? Yes. John can obtain a refund of taxes paid for 2016 within the three-year period ending on June 1, 2020, the date on which he filed his refund claim. John is treated as having paid the $5,000 of taxes withheld from his paychecks on April 18, 2017, the due date of the 2016 return. Therefore, all of the $1,500 of tax for which he is claiming a refund was paid more than three years before he filed his refund claim. By waiting too long, he has forefeited his right to the $1,500 refund.