TERRY, TIMOTHY F. & RICE, GRETCHEN (2005) (TRU) (IND)
Topic Code: D056Delinquent Returns (I) E161Estimated Tax - Application of Payments Document Reference: 06201002
October 4, 2005Michael Mesch, CPA
Terry, Lockridge & Dunn, Inc.
210 2nd Street SE, Suite 600
Cedar Rapids, IA 52407-5006
RE: Timothy F. Terry & Gretchen Rice
Docket No. 05-20-4-0038
Dear Mr. Mesch:
The review unit of the Iowa Department of Revenue has met and considered the above-referenced protest. After reviewing this matter, the review unit’s position is as follows.
Taxpayers filed their 2003 Iowa individual income tax return on October 28, 2004. On this return, taxpayers claimed estimated tax payments totaling $ 27,323.00, which represented their election to apply their 2002 overpayment to their 2003 estimated tax payments. The 2003 Iowa return showed an overpayment of tax in the amount of $8,413.00, which taxpayers applied to their 2004 estimated tax payments.
Taxpayers filed their 2002 Iowa individual income tax return on October 4, 2004. On November 19, 2004, the department issued a refund to taxpayers for 2002 in the amount of $26,835. A small refund of $484.00 for the 2001 tax year was issued to taxpayers on December 10, 2004. On January 6, 2005 taxpayers’ return preparer returned both of the refund checks with a letter stating that refunds should be applied to taxpayers’ 2003 tax liability.
On January 18, 2005, the department notified taxpayers that the department issued the refund for 2002 because taxpayers’ 2002 Iowa return was not filed by the end of the calendar year in which it was due. Consequently, the department disallowed the credit carry forward from 2002 and issued a notice of tax due on January 21, 2005. Taxpayers’ refund of $27,323.00 was applied to that liability and the balance, $5,097.51 was refunded to taxpayers with interest. The 2001 refund check of $484.00 was returned to taxpayers.
Taxpayers argue that they completed and mailed their 2002 Iowa return in a timely manner. Taxpayers immediately provided the department with a copy of their 2002 Iowa return when the department brought it to their attention that it could not locate a copy of their return for that year. Taxpayers also contend that penalty and interest should not be assessed as the department had the funds for the credit carry forward in its possession at all times. Therefore, taxpayers request that the department’s assessment for penalty and interest be overturned and these amounts be refunded to taxpayers.
Section 422.16(11) e Iowa Code and Administrative Rules 701—43.3(6) and 701—49.7 govern overpayments credited to estimated tax... Section 422.16(11) e states:
e. In lieu of claiming a refund, the taxpayer may elect to have the overpayment shown on the taxpayer’s final, completed return for the taxable year credited to the taxpayer’s tax liability for the following year. Rule 43.3(6) states: Any remaining balance of overpayment, at the election of the taxpayer, will be refunded to the taxpayer or credited as a first payment of the taxpayer’s estimated tax for the following year. However, a taxpayer nay elect to credit an overpayment from a return to the estimated tax for the following tax year only in cases when the return is filed in the same calendar year that the return is due.Rule 49.7 states:
For tax years beginning on or after January 1, 1994, taxpayers that timely file their Iowa returns and have overpayments shown on their returns my elect to have they overpayments credited to their estimated tax payments for the following year. For purposes of this rule, filing a return for a calendar-year period on or before the last day of the year in which the return is due will constitute timely filing of that return for purposes of being eligible to have an overpayment from that return applied to the estimated tax payments for the next tax year. In this instance, taxpayer must show that the 2002 Iowa individual income tax return was filed with the department no later than December 31, 2003. No evidence was provided with the protest which shows that the return was timely filed. Therefore, the review unit must look to the point when taxpayers provided a copy of their 2002 Iowa return as the date the return was filed, October 4, 2004. Since the 2002 Iowa return was not filed by December 31, 2003, taxpayer cannot apply the 2002 overpayment as an estimated tax payment for 2003. There is no connectivity between the 2002 and 2003 Iowa returns. For Iowa tax purposes, each year stands on its own (Iannone v. Iowa Dep’t of Revenue & Fin, 641 N.W. 2nd 735, 738-39 (Iowa 2002), where the Court cites 47A C.J.S. Internal Revenue § 22, at 88 (2001) "Each taxable year must be regarded as an independent unit for income tax purposes."). Therefore, it is the review unit’s position that the department correctly assessed the 2003 Iowa return for penalty and interest and correctly issued the overpayment for 2002 to taxpayer. This position is consistent with the cases In the Matter of Bonnie G. Suss, Docket No. 00-20-4-0221(2001) and In the Matter of Mark S. & Teresa A. Breheny, Docket No. 97-20-2-0167 (2000). Please respond in writing within thirty (30) days of the date of this letter whether you agree with the department’s position. If you agree, or choose not to pursue the protest then your letter will serve as authority for the review unit to close this protest.If you disagree with the review unit’s position and wish to pursue the protest, then your protest will be forwarded to a member of the Attorney General’s staff for further handling.
If no response is received within thirty (30) days, then the review unit will construe this inaction as failure to pursue the protest and will request dismissal of the protest pursuant to departmental rule 7.44 (2) IAC.
If you have any questions regarding this matter, please contact Dennis Schutt at (515) 281-7994 or by e-mail at Dennis.Schutt@Iowa.gov.
Sincerely,
Jim McNulty, Program Manager
Audit Services Section
Compliance Division