Disallowed Overpayment Credit for a Return Out of Statute

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    Daniel Gibson

    About a year ago, we were notified that the IRS disallowed a portion of an overpayment credit taken on a 2016 individual return that we prepared. When we did the research, we found that the origination of this portion of the credit went back to 2010. In 2010, the client received a 1099-R in which only a portion of the distribution was taxable. In preparing the draft of the return, the preparer put in the full amount of the distribution. Upon review, the error was discovered and the amount of the distribution was changed to the correct taxable amount. Unfortunately, for whatever reason, the efiled return did not reflect the corrected amount and fully taxed the distribution. No knowing this, we continued to prepare returns in 2011 through 2015, with a higher credit than the IRS had. Then we got the notice disallowing that portion of the credit for 2016 return and reducing what could be used in 2017. Had the IRS let us know in, say, 2011 or 2012, that we were using the wrong credit amount, we could have researched it then and we could have easily amended 2010. Now they are taking the position that the taxpayer is out of statute (Too bad, too sad). We got the Taxpayer Advocate involved and that went nowhere. Anyone come across anything like this and/or can offer up any options to preserve this credit (worth about $20K) ? Thanks!

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