Most taxpayers (and some tax professionals) have never heard of a “superseding tax return,” but taxpayers may benefit from filing one, assuming the IRS can process them quickly and properly. A quick primer: Many taxpayers overpay their taxes, whether through withholding or estimated tax payments. Through April 17, the IRS had processed 107 million tax returns and issued 81 million refunds. Most taxpayers who overpay elect to receive a refund, but some taxpayers elect to have overpayments applied against the tax they owe for the following year. Here, that means taxpayers who have filed 2019 tax returns and have elected to apply the 2019 overpayments against their 2020 tax liabilities. Once made, this credit election is irrevocable, which means the taxpayer ordinarily cannot later ask the IRS to refund the overpayment before filing a 2020 tax return.
During normal economic times, taxpayers do not think about revoking this credit election. But this year, some taxpayers who elected to apply 2019 overpayments against 2020 tax did so before the Coronavirus affected the economy; these taxpayers may have since been rendered unemployed or insolvent, or they may be earning less (taxable) income than they expected. As a result, they probably will owe less tax than they anticipated for 2020, and they need to get back their 2019 tax overpayments now to help meet their basic financial needs.
That’s where the value of a superseding return comes into play. If a taxpayer files a second return after the filing deadline, it is considered an “amended return.” Taxpayers cannot reverse an election to apply 2019 overpayments against 2020 tax on an amended return. But if a taxpayer files a second return before the filing deadline (i.e., July 15 this year or Oct. 15 on extension), the second return “supersedes” the first return. The second (superseding) return is treated as the original filed return, and the taxpayer may elect to receive the overpayment as a refund.
For business entities, this process should work relatively smoothly because superseding corporation and partnership returns may be e-filed by checking the superseding return box on the electronic submission. Refunds claimed on electronically filed returns and transmitted via direct deposit are often paid within a week. In the best of times, it takes four to six weeks for taxpayers to receive a paper check. Due to current circumstances, the issuance of paper checks may be delayed. A direct deposit is the quickest method to receive overpayments.
For individuals, the process takes longer. Superseding individual returns (Forms 1040) must be filed on paper and mailed to an IRS processing center. Paper returns are subject to processing delays and a greater risk of transcription errors. As the IRS processing centers were closed to protect the health of employees, documents sent to the IRS through the mail were not being opened. As the processing centers re-open, we anticipate delays in processing the backlog of paper returns and correspondence. Even so, filing a superseding return to request the overpayment be refunded now will generate the refund payment in 2020 rather than 2021. Providing bank or financial institution account information will further speed up the payment by four to six weeks. It is my understanding that paper returns will be processed in the order received, so there is no reason to wait.
I’m highlighting this issue to raise awareness that the filing of a superseding return may be a useful option for taxpayers (individual or business) who have hit hard times they didn’t anticipate when they filed their original returns. And within the IRS, I will be urging that paper returns be processed as quickly as possible after employees are safely able to return to work.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.