Current tax law allows corporations to obtain a Quick Refund from the IRS when they overpay estimated tax during the year.
However, no Quick Refund procedure exists for individuals who operate their businesses as limited liability companies, S corporations, partnerships or sole proprietorships. Taxes for these businesses are paid directly by the individual owners. Only businesses that pay tax at a corporate level, "C corporations," currently benefit from this Quick Refund procedure.
Since Jan. 1, 2009 corporations have been able to file a Form 4466 to recover their estimates of 2008 overpaid taxes. They can do this now, even though they may not file their tax returns until September 2009. In light of the current economic downturn, Quick Refunds will bring some critically needed funds into the economy, yet billions of dollars more could be infused if individuals were allowed the same opportunity.
We at the AAA-CPA suggest that Congress promptly enact legislation that will enable individuals to secure Quick Refunds of their overpayments of estimated tax in a manner similar to the procedure currently available to corporations. We recommend that such legislation be effective for the 2008 calendar year. These funds would allow individuals to endure the current tough times and/or invest in their businesses to become more competitive and profitable in the long term.
Many taxpayers already know that they have substantially overpaid their 2008 tax liabilities, yet they will not be able to claim refunds until they file their tax returns. We are finding that our clients with the largest refunds are those who are likely to be filing their tax returns in September and October of 2009. They need to await K-1s or accountings from their businesses and investments.
Some may suggest that those individuals could file their tax returns early and amend the tax returns upon arrival of the final information. This imposes a significant burden upon both taxpayers and the IRS in securing and processing the refunds. The whole philosophy of the Quick Refund procedure for corporations is to enable businesses to get their money back quickly and with minimum paperwork and expense.
In some cases, prior to the stock market plunge in late September, individuals elected to apply their 2007 overpayments to their anticipated 2008 tax liability. Without the Quick Refund capability, some have asked the IRS to now refund that overpayment. However, the IRS maintains that the election to apply the overpayment to 2008 is irrevocable. Accordingly, we also advocate legislation that will enable taxpayers to "undo" an election to apply an overpayment to the following year in a simple and expeditious manner.
By allowing this, taxpayers will be able to use their own monies to stimulate our current economic situation. We advocate that this "undo" provision would be available to all taxpayers, not just those operating businesses.
Consider the following example:
A taxpayer paid $160,000 toward his 2007 tax liability. For the first two quarters of 2008, the same taxpayer continued to pay at a rate of $40,000 per quarter in estimates. As a result of the final K-1 for one of the taxpayer's new businesses formed in 2007, the taxpayer had a tax liability of only $70,000 for 2007 and, accordingly, had a $90,000 overpayment for 2007. At the time the 2007 tax returns were filed (in early September 2008), the taxpayer believed his 2008 tax liability would be in the range of $160,000 to $200,000 and elected to apply the $90,000 overpayment to 2008.
In December, the taxpayer realized that his tax liabilities for both 2008 and 2009 were expected to be approximately $50,000 per year. He now has a $170,000 credit for 2008, $120,000 in excess of his expected tax liability. The taxpayer wishes to retrieve the $120,000 and submit quarterly 2009 estimates at a rate of $12,500 per quarter for 2009.
The proposed legislation for a Quick Refund for individuals would allow the taxpayer in the example above to promptly receive the $120,000. And, even if the Quick Refund provision were not enacted, implementing only the "undo" provision regarding the application of overpayments, would enable the taxpayer to secure back the $90,000 initially applied from 2007 to 2008.
In effect, we are trying to enable people to get back their own money more quickly and easily. We hope Congress agrees.
