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How the IRS disappears tax refunds on unified tax returns

Question

My client has not filed taxes for 10 years, and the IRS wants his returns. Now, the problem is not the money he owes but the at least $100,000 he overpaid. The IRS won’t refund the amount. Are there any options to open up those returns for a refund?

Answer

The refund statute of limitations is straightforward. Here are the two prongs: To claim a refund for federal taxes paid, you must file the refund claim within three years from the date the return was filed or two years from the date the tax was paid.
Since your client did not file the returns, the above prongs need not be considered. If you want to claim a refund under the two-year prong, the refund cannot exceed the amount paid in the two-year period immediately preceding the claim filing.
For example, say the tax returns for the years 2014-2024 are unfiled, and you are filing these returns in July 2024; you can seek a refund for 2022 and 2023 since those years fall within the last two years. However, the client can forget about refunds for the years 2014-2021.
Insight: On March 25, 2024, the IRS announced that 940,000 people had more than $1 billion in unclaimed tax refunds for 2020. For most of them, the statute of limitation has now expired, and the money belongs to the U.S. treasury.

Takeaways

Never give away your tax refund money to the IRS. You can prevent this situation by filing your tax returns on time.
Filing your tax returns every year should be the rule of the thumb, even when there are no filing requirements. A reason to file yearly is it initiates the statute of limitations.

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