Tax Refunds Do Expire: The Three-Year Time Limit

When it comes to federal tax refunds, many taxpayers are unaware of the critical three-year time limit. This rule stipulates that you must file your tax return and claim your refund within three years from the original due date. Failing to do so results in what is known as “forfeited tax refunds.”

The Three-Year Rule Explained

The Internal Revenue Service (IRS) enforces a three-year statute of limitations for claiming tax refunds. This period starts from the original due date of the tax return, not from the date you file. For instance, for 2020 tax returns that are due by May 17, 2021, the original tax due date, you must claim any refund by May 17, 2024. After this date, your refund becomes a forfeited tax refund.

Recently, a client of mine finally decided to catch up on five years of unfiled tax returns. It turned out that three of the five years had tax refunds but two of those refunds had expired. Both of those refunds totaled approximately $2,000. Not only were those refunds expired but they also weren’t available to offset any past due tax balances from other tax years.

The IRS maintains this deadline strictly and does not provide extensions, regardless of extenuating circumstances. Therefore, it is crucial to file your tax return and claim any eligible refunds promptly to avoid forfeited tax refunds.

Over $1 Billion Unclaimed Due to Forfeited Tax Refunds

As highlighted in a recent article by Bloomberg Tax, a significant amount of tax refunds go unclaimed each year. According to recent reports, approximately $1.5 billion in refunds remain unclaimed from the 2020 tax season. This represents about 1.5% of total tax refunds, emphasizing the frequency of forfeited tax refunds.



Several factors contribute to this situation. Some taxpayers may not realize they are eligible for a refund, while others may simply forget to file; also, some taxpayers may be reluctant to file due to owing back taxes for prior years. Regardless of the cause, the substantial unclaimed amount underscores the importance of adhering to the three-year limit to prevent forfeited tax refunds.

Avoiding Forfeited Tax Refunds

To prevent your refund from becoming a forfeited tax refund, consider the following steps. First, be aware of your filing deadlines and refund eligibility. Set reminders to ensure you file your taxes on time and keep track of any correspondence from the IRS. If you haven’t filed in several years, consulting a tax professional may help you claim any potential refunds before they become forfeited tax refunds.

Conclusion

In summary, the three-year limit for claiming tax refunds is a vital aspect of federal tax regulations. Understanding and adhering to this limit can help you avoid forfeited tax refunds and ensure you receive any refunds you are entitled to. With timely filing and careful planning, you can prevent losing out on your hard-earned money.

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