Get the most out of overpayments applied to the following year's return.

• Author: Chambers, Valrie

Many taxpayers have overpayments on their original return. A taxpayer can elect to have an overpayment refunded or applied to the subsequent year's estimated tax payment. This election, once made, is generally irrevocable (Sec. 6513(d); Regs.Sec. 301.6402-3(d); Rev. Rul. 55-448). Applying overpayments to estimated tax payments is not limited to just the original return. Taxpayers can also apply overpayments from amended returns (Forms 1040X, Amended Individual Income Tax Return, and 1120X, Amended U.S. Corporation Income Tax Return) to a later year's estimated tax payments.

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Caution should be taken with using Form 1040X or 1120X overpayments to pay the current year's estimated tax payments. The IRS is required to review all refund claims before allowing the overpayment. If the amended return is selected for audit or just held up in the IRS system, the subsequent year's return may be due and the overpayment from the prior year will not be there to pay the current year's taxes. This is especially true if the requested overpayment is more than the threshold of $2 million, above which refunds cannot be paid until 30 days after Treasury reports the refund to the Joint Committee on Taxation (Sec. 6405(a)); these overpayments should never be applied as an estimated tax payment for the current year, as it is highly unlikely that the examination of the amended return and joint committee process will be completed before the due date of the subsequent year's return.

If the taxpayer is filing a carryback claim on Form 1045, Application for Tentative Refund, or 1139, Corporation Application for Tentative Refund, these overpayments can be applied to a current year's estimated tax payments as well. Unlike the 1040X and 1120X procedures, the carryback claims on Forms 1045 and 1139 are generally processed within 90 days of filing. This is because the IRS allows the overpayment before any detailed review or examination. Accordingly, the IRS should allow taxpayers to request that these overpayments be applied to a currentyear estimated tax payment before the currentyear return is filed.

An overpayment applied to the subsequent year's estimate is referred to by the IRS as a "credit elect." Once the credit elect is applied to the next year's account, it is a payment for the subsequent year's return (Sec. 6513(d)). The IRS will reverse this payment back to the prior year only if (1) the IRS applied the overpayment as a credit elect due to...