Misapplied payment does not result in erroneous refund.

• Author: Beavers, James
• Position: 2017 Tax Court memorandum decision in Schuster v. Commissioner

The Tax Court held that a credit made by the IRS to a taxpayer's account, which stemmed from its misapplication of a payment for the taxpayer's mother in an earlier year, was not an erroneous refund.

Background

Neil Schuster had federal income tax of $3,271 withheld and made an estimated tax payment of $15,000 for 2004. On April 15,2005, he filed Form Am, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, and included a $580,000 check to pay what he believed was a reasonable estimate of the amount of tax due for 2004. The IRS granted Schuster an extension of time to Aug. 15,2005, to file his 2004 tax return.

On April 15,2005, Schuster also remitted to the IRS an $80,000 payment on behalf of his mother with respect to her tax year 2004. The IRS erroneously credited his mother's $80,000 payment to his account for 2004. On Aug. 15, 2005, Schuster filed for an additional extension until Oct. 15,2005, which the IRS granted.

The IRS received Schuster's 2004 return on Oct. 21,2005. In that return, he showed total tax of $519,718, which was less than he had anticipated when he filed Form 4868 on April 15,2005, and remitted his April 15,2005, payment to the IRS. On Nov. 28,2005, the IRS assessed the total tax shown on his 2004 return. On his 2004 return, Schuster elected to apply any overpayment for his tax year 2004 to his 2005 estimated tax. The result of the IRS's error was to increase by $80,000 the amount applied to his 2005 return.

The IRS did not became aware of the error it made regarding the misapplied payment until 2009. Schuster was was either unaware of the error or was aware of it and did not ask the IRS to correct it. Each year from 2004 to 2007 he elected to have excess taxes he had paid and the erroneous credit amount applied to his return for the next year. He used some of the erroneous credit amount in 2006 to offset tax he owed, so the amount of the erroneous credit carried forward to 2007 was reduced to $32,955. Schuster carried forward the same amount from 2007 to 2008. For his 2008 return, Schuster elected to have his excess tax paid for the year refunded to him. Including the erroneous credit carryforward, Schuster's 2008 return showed a refund due of $39,204, so the IRS refunded that amount to him in 2009.

At this point, the IRS finally checked Schuster's account and determined that it had incorrectly applied the $80,000 payment meant for his mother's account in 2004 and allowed the payment...