When do sec. 6402 offsets trigger the refund limitation period?

• Author: Smith, Annette

Sec. 6402(a) allows the IRS, within the applicable limitation period, to credit the amount of an overpayment, including any allowable interest, against any liability in respect of an internal revenue tax owed by the person who made the overpayment.

Although offsetting is discretionary (see Northern States Power Co., 73 F.3d 764 (8th Cir. 1996) ("Section 6402 is clear: the IRS 'may credit the amount of such overpayment ... against any liability'")), the IRS generally will offset to the extent that the liability exists at the time the overpayment is determined (Federal National Mortgage Association, 56 Fed. Cl. 228 (2003)). As a practical matter, such offsets occur routinely.

An offset under Sec. 6402(a) implicates the limitation period on credits or refunds provided in Sec. 6511. One way for a credit or refund claim to be timely under Sec. 6511(a) is for it to be filed within two years from the time the tax was paid; thus, it is critical to determine the date on which a liability satisfied by credit of an overpayment is considered to have been paid.

That same determination also is relevant to the lookback period in Sec. 6511(b)(2)(A), which limits the amount that can be credited or refunded when a timely claim has been filed. That provision describes a period that ends on the date the claim for credit or refund is filed and begins three years before that date. Any amount paid within that lookback period (plus the period of any extension of time for filing the return) may be credited or refunded pursuant to that claim.

The question of when a liability satisfied by a credit offset is considered paid is not answered by Sec. 6513. That section provides that (1) prepayments (including withheld tax and estimated tax) are deemed to have been paid on the unextended due date of the taxpayer's return (Secs. 6513(a) and (b)); and (2) an income tax overpayment the taxpayer elects to have applied to the next year's estimated tax liability is considered a payment for that succeeding year (Sec. 6513(d)) and therefore deemed paid on the unextended due date of that return by operation of Sec. 6513(b). However, Sec. 6513 is silent with respect to Sec. 6402 offsets.

In the case of an offset, one possible "date of payment" is the date on which the overpayment actually is applied or "posted" to the balance due account. This approach not only has some logical appeal, but it also should be easy to administer because the date of the transfer would be set forth on...