Interest on Exam Changes Properly Assessed Because Taxpayer Applied Overpayments To Future Years

A federal district court in Goldring, (DC LA 9/28/2020) 126 AFTR 2d ¶2020-6254, has held that the IRS properly assessed interest on a taxpayer’s underpayment. The couple elected to apply an overpayment to future years, so that overpayment wasn’t available to apply to the underpayment for the year at issue. 

The IRS is authorized to credit any overpayment of tax against any outstanding tax liability owed by the taxpayer making the overpayment and refund any balance of the overpayment to that taxpayer. (Code Sec. 6402(a); Reg. §301.6402-1)

However, a taxpayer’s election to apply an overpayment to a subsequent year is irrevocable and binds both the taxpayer and the IRS. (Code Sec. 6513(d))

Once The Taxpayer Makes The Election To Apply An Overpayment To A Subsequent Year, IRS Cannot Offset
The Overpayment Against Any Additional Tax For The Year
Of The Overpayment. (Rev Rul 77-339, 1977-2 CB 475; Rev Rul 55-448, 1955-2 CB 595)

On her 2010 return, taxpayer Goldring reported a lawsuit settlement as capital gain, overpaid her tax liability and elected to carry the overpayment forward to future tax years. The IRS disputed Goldring’s characterization of part of the lawsuit settlement ("disputed amount") as capital gain.  

In 2020, a federal district court determined that the disputed amount was interest and, therefore, was taxable as ordinary income. (Goldring, (DC LA 4/13/2020) 125 AFTR 2d 2020-1701)

After the district court determined that the disputed amount was ordinary income, the IRS assessed Goldring with additional tax for 2010 and accrued interest from the due date of her 2010 return. 

Goldring argued that she shouldn't owe interest because she had enough of an overpayment in 2010 to cover the additional tax; therefore, interest did not accrue on her underpayment from the due date of her 2010 return.

The district court determined that the IRS properly assessed interest on Goldring’s 2010 underpayment.

Contrary to Goldring’s argument, the IRS could not use her 2010 overpayment to offset the additional tax assessed for 2010 because Goldring elected to carry over to a subsequent year that overpayment, and the IRS was bound by her election. Since the IRS had no funds it could use to offset the additional tax for 2010, interest began to accrue on the underpayment on the due date of Goldring’s 2010 return.

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