@Carl wrote:
This is not complicated - though some get the false impression that it is. The key here is "PROOF" that will stand up in a court of law should that become necessary. When it comes to repayment of an over payment of wages, I've never heard of it ending up in tax court - much less seen it.
There are several claim of right tax court cases although they mostly involve corporations and much larger amounts than we are talking about here.
This is what the Journal of Accountancy Says:
Sec. 1341 allows a taxpayer to take a deduction or a credit if he or she repays an amount exceeding $3,000 that the taxpayer had reported as income in a prior tax year because he or she appeared to have had an unrestricted right to the item, but it is determined in a later tax year that the taxpayer did not actually have that unrestricted right. The repayment must also be deductible under some other Code provision. Taxpayers who know that they have improperly acquired income cannot have an unrestricted right to it. In the later tax year, to show that there was no unrestricted right to the income, the taxpayer must demonstrate that the reported amount was involuntarily given away because of some obligation and the obligation had a substantive nexus to the original receipt of the income. [https://www.journalofaccountancy.com/issues/2019/sep/irs-sec-1341-claim-of-right.html] [emphasis added]
- Did it appear you had an unrestricted right? It seems no.
- Did you improperly acquire the money, that would bar the credit? That seems a no as well, and we don't need to pursue that further, but it is something you should be aware of that could be used against you.
- Did you involuntarily give up the money in 2020? You might want to get the company to send you a demand letter so you have it all on paper.
Interestingly, in another case the Journal of Accountancy writes:
This case joins others in which the courts took a very broad view of section 1341. The outcome is due, in part, to the general rule that remedial provisions should be interpreted broadly and all doubts resolved in the taxpayer’s favor. If this trend continues, more companies should be eligible to use the relief provision contained in section 1341.
Most individual taxpayers aren't audited, so you can probably use the Claim of Right credit without worry. But I am not a tax expert, and no one on this board will stand with you at any audit. Educate yourself, and decide if it's worth the risk, and whether you want additional professional help.
