If I were due a federal refund in 2011 and owed in 2012 and did not file either year, can I apply the 2011 refund to the 2012 bill? I know I can no longer claim the refund for 2011. Will the IRS handle this automatically?
In reality, there were 2 years I was due a refund and a year I will owe a substantial amount.
I am using FreeTaxUSA to prepare the prior year returns. They have an option to apply the refund to next years taxes, but I don't see any difference in the 1040 that's being created.
It doesn't appear that you can apply refunds due that are outside the statute of limitations to years where taxes are due. According to the IRS Tax Topic 153:
An original return claiming a refund must be filed within 3 years of its due date for a refund to be allowed in most instances. After the expiration of the three-year period, the refund statute prevents the issuance of a refund check and the application of any credits, including overpayments of estimated or withholding taxes, to other tax years that are underpaid.
