Where’s My @#$%&* Money?! – The IRS’s Three-Year Rule Regarding Late Filed Returns, Explained

Shaun thought he had it all figured out. You see, Shaun owed over $40,000 in unpaid child support. Because his child’s mother would not give him a detailed accounting of how his child support money was spent, he refused to cooperate and chose to work for an employer that paid him “under the table” so none of his earnings would be sent to the state’s Attorney General for his child support.

Year-after-year, however, the Internal Revenue Service seized his tax refunds and applied them toward his child support arrears. That’s when he had the “brilliant” idea to stop filing his federal tax returns. In his mind, it was as simple as waiting until the child turns eighteen. He could then get several years’ worth of tax refunds all at one time.

Most people know immediately that this is a terrible idea for several reasons. The first is that child support arrears do not magically go away once a child reaches the age of majority. The second is that failing to file a tax return is a federal crime.

The final reason is the subject of this article: the IRS is not obligated to pay a refund on a return filed three years or more after its due date. This article will briefly discuss why this is the case and explore the policy reasons underlying this limitation. While other states may have their own rules for paying refunds on late returns, this article will be limited to discussing only the federal income taxation system as administered by the IRS.

Late Returns & The Three-Year Rule

Most people are familiar with the idea behind a “statute of limitation.” For most legal claims, there is a period of time to pursue those claims or else they lose the opportunity. Some claims — such as severe criminal offenses — do not have a statute of limitations. Others may have multiple limitation periods. For example, workplace discrimination claims require a wronged employee to file a “charge” with the Equal Employment Opportunity Commission (EEOC) within 180 or 300 days after some adverse action was taken and then require said employee to file a lawsuit 90 days after receiving a “Right to Sue” letter.

The Three-Year Rule for late returns is a statute of limitation. After three years, the IRS does not have to pay out on a refund. They still may and sometimes do but the decision is one of discretion rather than entitlement. Barring some extenuating circumstances — such as being in a coma — there is generally no recourse if the IRS refuses to pay you. If the IRS does pay anything, the IRS will repay money you paid in through payroll deductions but not pay out on credits such as the Child Tax Credit or the Earned Income Tax Credit.

Policy Explanation

There are several reasons that the IRS does not pay out refunds for returns filed over three years late. The initial example in this article is one such reason: the system could be abused if there was not a bright line rule. In our example, Shaun wanted to evade wage garnishment for child support and hoped holding off on filing his tax returns would have a similar effect.

Another is that it is a crime to not file your tax return if you make above a certain threshold. The IRS lacks the resources to charge every single American who fails to file every year. By having the discretion to withhold income tax refunds, there is additional incentive for people to file their taxes as required.

Finally, large organizations such as the Federal Government of the United States need consistency and order to function. How could Congress or the Executive Branch estimate their budgets or project tax revenues if millions of people could file ten-plus years of tax returns for billions of dollars in refunds suddenly? Such a scheme would be unworkable.

Do you have unfiled tax returns and want help getting caught up? Please feel free to reach out to our office at (903) 221-9180 or to email our Client Services Director at evelyn@matthewlewislaw.com

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