Sending an Overpayment Check to the IRS: Understanding the Risks and What to Do Instead

Introduction

It is an understandable and often tempting idea to send a large check to the IRS when you think you may owe more than what you currently know. However, this approach could lead to significant financial and legal issues. The IRS has a set process and expects you to formally file your tax return. This article will explain why you shouldn't send an overpayment without a tax return, what happens if the IRS estimates your tax liability without your input, and what actions you should take instead.

Why You Shouldn't Send Overpayment Without a Return

When you send a large check to the IRS without a tax return, they face a dilemma. Without any details about your income, deductions, and credits, the IRS cannot accurately calculate the total amount you owe, nor can they determine any refunds due to you. Here are the potential consequences:

Incorrect Deductions and Expenses: The IRS will not consider any deductions or expenses unless explicitly stated on your tax return. This means they might not apply important deductions and credits, leading to an incorrect total.

Creditors and Future Tax Payments: Your overpayment check could be applied to your future tax liability if withholding is required, and the IRS might not return the excess amount. This could create a financial strain in the coming years.

No Official Proof: Without a filed tax return, there is no official record of your tax liability, and you may not be able to claim a refund if you need one.

Understanding the IRS's Estimate Process

The IRS has a system to estimate your tax liability based on your name, date of birth, Social Security number, and last known address. This estimation is based on previous tax returns and tax records. However, this information is often outdated and incomplete:

Delays and Incomplete Information: The IRS system typically runs at least 3 years behind, and the information they have is minimal. They know your basic information but lack details on your filing status, dependents, and other important factors that can affect your taxes.

Limited Accuracy: The IRS will estimate your tax liability using assumptions that are favorable to the government. This means that if you do not file a return and leave it to the IRS to estimate, you might end up owing more than you actually do.

Penalties and Interest: If the IRS estimates that you owe more based on incomplete information, they will notify you and impose penalties and interest. This could be more than if you had filed your return accurately and proactively.

A Savvy Businessman's Experience

There are cases where individuals have strategically overpaid their taxes to anticipate a future debt. For example, a savvy businessman may overpay his taxes when expecting a large debt to come due. This ensures that his money is not accessible to creditors until after he has filed his return. This is a complex strategy that requires careful planning and can be risky without professional advice.

Dirty Little Secret Time: IRS Estimation Without Your Return

If you do not file a tax return, the IRS will estimate your tax liability by using assumptions that are most favorable to the government. This means that even if you have paid enough in taxes, you may be still liable for additional taxes. However, there is a silver lining:

If you have paid in at least the estimated amount, the IRS is less likely to initiate any further action against you. They will simply note the payment without pursuing any additional refunds or debts.

Refund Claim Deadline: You have 3 years from the original filing deadline to claim a refund of taxes paid. If you fail to file a return, you will lose the right to claim the refund. The IRS cannot pay a refund if you do not file an original return.

Given these factors, it is crucial to file your tax return and provide accurate information. While it may not be the most convenient, it ensures that you are treated fairly and can take advantage of all the tax deductions and credits available to you. Sending an overpayment without a return is not a wise financial decision and can lead to unexpected complications.