Q&A: How the IRS Disappears Tax Refunds on Unfiled Tax Returns

Question

Randy, I have a client who has not filed his taxes for 10 years, and now the IRS is after his returns. The problem is not that he owes money but that he has overpaid by at least $100,000, and the IRS won’t refund his money. Are you aware of any ideas to open up those returns for a refund?

Answer

The refund statute of limitations is straightforward and consists of two prongs. To claim a refund for federal taxes paid, you must file the refund claim within the later of:

1. Three years from the time the return was filed, or
2. Two years from the time the tax was paid.

Since your client did not file any returns, the three-year prong does not apply. Instead, you will need to claim the refund under the two-year prong, which means the refund cannot exceed the amount paid in the two-year period immediately preceding the claim filing.

Let’s assume in your case that tax returns for the years 2014 to 2023 are unfiled, and you are filing these returns in July 2024. You can seek refunds for 2022 and 2023 because those years fall within the last two years (the two years when the client had withholding or made estimated payments).

However, your client can say goodbye to the refunds for the years 2014-2021.

Insight

On March 25, 2024, the IRS announced that 940,000 people have a total of more than $1 billion in unclaimed tax refunds for the tax year 2020. For most of them, the statute of limitations has now expired, and the money belongs to the U.S. Treasury.

Takeaways

1. File Your Tax Returns on Time: Avoid losing your tax refund money to the IRS by filing your tax returns on time.
2. Annual Filing: Filing your tax returns annually should be the rule of thumb, even when you don’t have a filing requirement. One reason to file annually is that it starts the statute of limitations.

Remember

The IRS has strict rules regarding the refund statute of limitations. If your client hasn’t filed tax returns for many years, they may miss out on significant refunds. It is crucial to file tax returns promptly to avoid losing hard-earned money to the U.S. Treasury.