Can I Recover Income Tax Refunds When I File My Returns Late?

Many individuals and businesses fail to file their income tax returns for multiple years for a variety of reasons, usually stemming from life and business pressures that made it almost impossible for them to file their returns. When they finally have the time and motivation to prepare and file the returns, they realize that they overpaid their taxes for many years. They then discover that it may be too late to recover some of these refunds. This seems unfair. They ask us if there is some way to get the refund, even though it has been more than three years from the original due date of the return. This is commonly referred to as “equitable tolling,” and unfortunately, it does not apply to late filed claims for refund. While the United States Supreme Court ruled on this question 15 years ago, we are often asked this question and believe it deserves to be revisited.

Congress created IRC Section 6511 to set limits on when a taxpayer can pursue the government for overpaid taxes. A claim for credit or refund of an overpayment of income tax must be filed by a taxpayer:

  •  Within 3 years from the time the return was filed; or
  •  Within 2 years from the time the tax was paid, whichever of these periods expires later.
  •  If no return was filed, then the claim must be filed within 2 years from the time the tax was paid.

When a claim is filed within these periods, the taxpayer may still not be able to recover all of the taxes paid. If a claim was filed:

  • Within three years from the time the return was filed, then the amount of the credit or refund is limited to the tax paid within three years of filing the claim, plus the period of any extension of time for filing the return.
  • Outside of the 3-year period, the amount of the credit or refund is limited to the amount paid during the 2 years immediately preceding the filing of the claim.

If a claim was filed by the taxpayer but rejected by the IRS, the taxpayer may bring a suit for refund under IRC Section 7422 anytime:

  • After 6 months from the date of filing the claim (unless the Secretary renders a decision thereon or the taxpayer files a written waiver agreeing that the IRS need not send him or her a notice of disallowance);
  • Before the expiration of 2 years from the date of mailing by certified mail or registered mail by the Secretary to the taxpayer of a notice of the disallowance of the part of the claim to which the suit or proceeding relates or the date of the waiver. The taxpayer and the IRS can extend this 2-year period by an agreement in writing.

There are exceptions to these time periods for income taxes that are specifically listed in IRC Section 6511. These exceptions apply to:

  • bad debts and worthless securities;
  • net operating losses or capital loss carrybacks;
  • foreign tax credits;
  • credit carrybacks;
  • self employment tax;
  • income recapture in qualified plan terminations;
  • uniformed service retired pay; and,
  • situations when a taxpayer is unable to manage financial affairs due to disability.

When a taxpayer does not meet these time periods, or exceptions, he or she often asks us about whether there is any basis to extend these periods because of his or her particular difficult circumstances and what appears to be blatant unfairness. This is commonly referred to as “equitable tolling” and, unfortunately, it is not available to extend these time periods or increase the amounts available to be refunded.

The United States Supreme Court ruled that equitable considerations could not alter the statutorily prescribed time limits. United States v. Brockamp, 519 U.S. 347, 117 S. Ct. 849, 136 L. Ed. 2d 818 (1997).

Congress did not intend the “equitable tolling” doctrine to apply to §6511’s time (and related amount) limitations for filing tax refund claims. . . . . Section 6511 sets forth its time limitations in a highly detailed technical manner, reiterates them several times in different ways, imposes substantive limitations, and sets forth explicit exceptions to its basic time limits that do not include “equitable tolling.” To read such tolling into these provisions would require one to assume an implied tolling exception virtually every time a number appears in § 6511, and would require the tolling of that section’s substantive limitations on the amount of recovery—a kind of tolling for which there is no direct precedent. There are no counterindications of congressional intent.

One year later, the Federal Circuit Court of Appeals in RHI Holdings, Inc. V. U.S., 142 F.3d 1459 (C.A. Fed., 1998) applied the principles of Brockamp and dismissed a suit where the taxpayer alleged that the IRS’s misconduct confused him into allowing the limitations period on refund claims to expire.

In 2001, a taxpayer argued to the United States Tax Court that even though he had filed his returns after the three-year period for claiming a refund, it was unfair for the IRS to not credit him with legitimate refunds as he had consistently paid his taxes early. The Court held that the statutory three-year time limit could not be avoided by equitable arguments. Landry v. Comm’r., 116 TC 60 (2001).