This is a question that bedevils everyone whose income varies widely from year to year. One files the Forms 1040-ES or uses EFTPS, and may or may not have applied any previous year’s overpayment, and prays it adds up to the 90%-100%-110% Section 6654(d) withholding target. I’ve always hit it so far, but a number of times it’s been a close-run thing.

So when you’ve got an overpayment, what do you do? Do you take the refund and try to play catch-up with your estimateds if a big score comes through, or roll it over (putting it out of the reach of temptation)?

It gets expensive if you get it wrong.

Judge Christian N. (“Speedy”) Weiler man-‘splains in an off-the-bencher, Joseph C. Honer, Jr., Docket No. 3985-20, filed 4/28/22. Joe got the numbers wrong on his 1040 for year at issue (YAI), so IRS gave him a SNOD at no extra charge. So there was a deficiency (tax shown on return less than tax due), but Joe also overpaid for YAI, even taking into account the deficiency.

That overpayment would have zeroed Joe’s tax bill for YAI, except Joe applied the stated overpayment to YAI-plus-one, and got a refund for YAI-plus-one.

“Petitioner disputes there is a deficiency in tax owed and points the Court to the amount of tax he paid for [YAI]. In other words, petitioner argues there is no tax deficiency since the total tax due – as adjusted to include the deficiency – would still reflect an overpayment after considering the amounts paid.” Transcript, at p. 6.

No, says Judge Speedy. A deficiency is not the same as an underpayment of tax. Based on the YAI return and the facts stipulated, the amount shown on the YAI return as tax due is less than the tax actually due.

But what about the overpayment?

“Based on the original return as filed by petitioner, there was an original overpayment of the tax of $13,096. Petitioner argues that after the increased tax deficiency of $6,491, no balance should remain since the tax deficiency is less than petitioner’s overpayment amount. However, petitioners [sic]  argument fails to consider how he directed the overpayment amount to be carried forward to [YAI-plus-one]. The IRS honored petitioner’s request and applied $13,096 to petitioner’s [YAI-plus-one] tax year. Consequently, we find no overpayment remains for [YAI].” Transcript, at p. 7.

But can’t Tax Court decide if there was an overpayment?

Sure it can, and sure there was, but the petition puts at issue only YAI, not YAI-plus-one. And Joe threw the overpayment into YAI-plus-one, thus ousting Tax Court of jurisdiction thereover. And apparently got the overpayment refunded for YAI-plus-one

Joe wants costs and sanctions, but the costs are COVID-created, says Judge Speedy, and IRS didn’t violate any Court orders or Rules.

So, practitioner, what do you tell the client? Take the refund, only to have to pay it back with the current-year’s estimateds? Roll it over, and risk not having it available to cover a YAI deficiency? And whatever you tell the client, note that s/he will blame anything that goes wrong on you.

Isn’t tax practice fun?