What is the Penalty for Tax Overpayment?

by Jodee Redmond ; Updated March 15, 2018

Most taxpayers are concerned about the potential penalties the IRS can mete out to those who underpay their taxes. The situation is completely different if you happen to overpay your taxes.

Income Tax Return Results Show Income Tax Status

When you fill out your income tax return, the final result indicates whether you have a balance due or will receive a refund. In most taxpayers’ minds, receiving an income tax refund is good news.

A large income tax refund isn’t the good news it seems to be at first sight. It is a sign that you have overpaid your taxes throughout the year. The government has had access to that money on an interest-free basis during that time.

How an Income Tax Overpayment Can Occur

There is more than one way that you can overpay your income taxes. Here are a couple of examples:

Overpayment Results From Last Income Tax Paid: Any amount of money that is paid by a self-employed person or contractor as estimated income tax, withheld for income tax purposes, or paid before the income tax return due date is considered paid on the last day for filing the return. If you made payments for estimated taxes due March 30, June 30, Sept. 30 and Dec. 30, your Dec. 30 payment usually isn’t credited to you until April 15 the following year—the statutory date for filing your income tax return.

Once the Dec. 30 payment is credited to you, it lowers any amount you owe to the IRS. You may even be owed a refund.

Overpayment Resulting From Applying the Earned Income Tax Credit: The Earned Income Tax Credit is a refundable tax credit, which is one that is treated in the same manner as a tax payment. As the name implies, it can result in a tax refund.

To qualify for the credit, you need to have earned income from employment or your own business and meet certain income limitations based on the size of your family.

Once the amount of the credit is applied to your income tax return as an amount paid for taxes, you may be left with an overpayment as of the due date of your income tax return. Since this credit is calculated based on your income multiplied by a certain percentage, it’s possible that if an error was made in calculating or entering your income from your business or employment on a tax form, the amount of any EITC entitlement would be affected as well. These circumstances could account for an overpayment of tax.

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What Is the Penalty for Tax Overpayment?

The good news is there is no penalty for tax overpayment. As long as your income taxes are paid in full, the IRS does not have a problem with you.

What to Do if You Overpaid Your Taxes

If you believe you have overpaid your taxes, don’t wait to take action to correct the issue. You have the right to file a claim for a refund to receive the money owed to you. The general rule is that you have a three-year time limit to file your refund claim. The time limit starts to run from the date you filed your original tax return, or two years from the date that you paid the tax, whichever one is later.

Your first move should be to gather your receipts and supporting documentation to support your claim for a refund. Next, contact the IRS to explain your situation and ask about the best way to resolve the matter. If you aren’t satisfied with the response, seek professional help from a tax preparer, an accountant or lawyer. Depending on your income, you may also be able to seek assistance from a Low Income Taxpayer Clinic.

About the Author

Jodee Redmond is a freelance writer, author, editor, blogger and award-winning Internet researcher. She is a graduate of Centennial College in Toronto who has been freelancing since 2000. Jodee has also worked as a tax consultant, in sales and was a legal assistant for a number of years.

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