Offset underpayment with overpayment for interest

Apparently I underpaid my taxes for 2005 by not reporting a capital gain. (My fomer employer closed out my ESOP either because I was laid off or because they were taken over or both. I'd thought that amount was included in my severance and thus in my W-2 but it wasn't.) I paid the additional tax; no penalty was assessed.

IRS also billed me for interest. I've never paid estimated taxes. Presumably I owed the Treasury these extra taxes from around April 15,

2006 (when I filed) to spring 2007 (when they billed me.) But I received a refund (too large by this amount) in 2006, and a large refund in 2007. When I filed 2006 I asked that more than enough of my refund to cover the underpayment be held back for future taxes, because I didn't want to have more of the Treasury's money than I ought to.

Once we came up with a number (IRS first assumed short-term with zero basis) I learned that the "hold on to my refund for next year" can't be applied to past years, so I paid the bill under separate cover, and requested the unpaid refund back (just doing my part to keep the economy stimulated) and they sent it to me.

It seems to me that there was very little time that I owed anything to the US Treasury. Even though I got too large a refund around May

2006, by then I'd been over-withheld for 2006 wages; by some time well before the end of 2006 until I filed in April 2007, and continung until they processed the refund request, the amount I was owed was more than the underpayment.

I know IRS doesn't pay interest on over-withholding that is later refunded.

Do they ever offset unerpayments with over-withholding payments for interest purposes? I've asked them to recalculate the interest and find it wasn't owed. The first answer letter addressed a totally different issue; the second letter said they can't forgive and waive interest.

What are the right words to say "You calculated interest but I didn't owe any interest because in net I didn't owe you any money at all." Does that argument hold at all by IRS accounting rules?

-- - David Chesler Free Cory Maye

Reply to
David Chesler
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By IRS rules, your 2006 withholding was credited to you not when it was withheld during the 2006 tax year, but with an effective date of 04/15/2007. If the 2006 overpayment had been applied to the 2005 liability, you would have been on the hook for interest from 04/15/2006 to 04/15/2007. Since you paid the 2005 tax bill in the Spring of 2007, you realized approximately the same net result.

Reply to
Paultry

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