Correcting Taxpayer Mistakes

Published for Coates' Canons on March 30, 2021.

How far will your tax office go to fix mistakes caused by taxpayers? Consider the situation in which a taxpayer mistakenly makes a payment on property owned by another party.  The tax office applies the payment as instructed.  Later, the taxpayer or the tax office discovers the mistake. Can the tax office move the payment to the correct property?

I posed this question to tax offices across the state via the Ptax listserv and got more than 50 responses.  Here’s how they broke down:

No, we would not move the payment to another property: 37 jurisdictions (70%)

Yes, we would move the payment, at least in some situations: 16 jurisdictions (30%)

As many jurisdictions pointed out (even those that said yes), moving payments from one property to another is technically a release of the taxes on the first property.  Under GS 105-380 and-381, releases are permitted only for illegal taxes or taxes levied due to clerical errors by the tax office.  Errors by taxpayers or their agents do not justify releases under GS 105-381.   Read this post or this one for more on refunds.

Bottom line: GS 105-380 and -381 prohibit moving payments from one property to another to correct an error made by the taxpayer or their agent.  Of course, if the tax office made the error and applied the payment to the wrong property thru no fault of the taxpayer, the tax office could and should correct that error ASAP under GS 105-381.

That said, I recognize the strong desire by local government officials to be responsive to their taxpayers.  Given that admirable inclination, I think it is a reasonable and a low-risk approach to move payments from one property to another to correct an error made by the taxpayer or their agent in limited situations.

In many situations, moving tax payments from one property to another can create all sorts of problems beyond a technical violation of GS 105-381.  A tax office is likely to cause more harm than good by moving a payment to another property if, since the payment was originally applied to the “wrong” property:

(i)  either property has been transferred;

(ii)  the tax office issued a “statement of taxes due” on either property under GS 105-361; or,

(iii) taxes for the year in question have become delinquent and started accruing interest.

I strongly recommend not moving payments in any of the above situations.

The first two situations involve reliance by third-parties on the original tax payment application.  The parties who took action based on the apparent payment of taxes on a particular parcel are going to be justifiably furious when that payment is moved to another parcel. If as in situation (ii) that reliance involves a statement of taxes due, then any taxes that are later reinstated on the parcel that was the subject of that statement would be waived due to the fact they were not included on that statement.

For example, assume Tommy Tarheel owns Parcel A but mistakenly sends payment with instructions to apply the payment to Parcel B.  One week later, the tax office issues a statement of taxes due on Parcel B to Billy BlueDevil, a potential buyer of Parcel B.  That statement reflects the application of Tommy’s payment to Parcel B.   Billy buys Parcel B in reliance on the statement.  One month later, Tommy realizes his mistake and asks the tax office to move his payment from Parcel B to Parcel A.  If the tax office complied with this request, the taxes that would be reinstated on Parcel B would not be enforceable against Billy because he relied on a statement of taxes due that indicated those taxes were no longer a lien on Parcel B. The county would not be able to recover the taxes now owed on Parcel B.

In scenario (iii), moving payments would require retroactive accrual of interest on the parcel to which the tax payment was originally applied and additional action under GS 105-381 to waive the interest that has accrued on the parcel to which the tax payment is being moved.  Read this post for an explanation of why that is problematic.

But if none of these situations exists, then moving a payment to resolve a taxpayer error might be reasonable.

Assume a payment for 2021 taxes is received in October 2021 and applied (as per the taxpayer’s instructions) to the “wrong” property. A week later the taxpayer calls in a panic begging the tax office to correct his error.  If the tax office can confirm that none of the situations listed above exist, correcting the taxpayer’s error here is unlikely to create problems for the county or other taxpayers.  The county is not losing any tax payments nor are any third-parties likely to suffer any negative consequences from the move.

A jurisdiction that wishes to pursue this more lenient approach should consider developing a written policy that identifies the situations in which such moves will and will not be made.  For example, a local government could exclude the situations listed above.  It might also exclude incorrect payments made by mortgage banks and other taxpayer agents, on the theory that the taxpayer can recover the misdirected payment from those agents. The policy could set a time limit on requests for moving mistakenly applied tax payments, on the assumption that the longer a payment is on the record for the “wrong” property the greater the likelihood of third-party reliance.  Regardless of what the policy covers, tax offices should get buy-in from their managers and governing boards.

Please don’t interpret my analysis as encouraging jurisdictions to violate GS 105-381. To be clear, the safest and most legally correct action is to refuse to move tax payments to correct taxpayers’ mistakes.

But I believe that many elected officials would not be happy to hear that their tax office refuses to take action to remedy a taxpayer’s mistake when that action will not cause harm to the county or to other taxpayers. With advance planning, jurisdictions that wish to be more flexible can do so in some situations with minimal risk.

Also remember that jurisdictions unwilling to move tax payments due to taxpayer mistakes can take other actions to help the affected taxpayers.  Tax offices that process payments manually can reach out to taxpayers who mail payments for properties owned by other taxpayers before processing those payments to ensure they are applied properly.  If a payment is misapplied due to a taxpayer’s mistake, the tax office is free to give that taxpayer the contact information for the owners who benefited from the misapplication to see if the taxpayers can resolve the situation privately.

Got additional ideas about how to help these taxpayers? Share them in the comment section below.

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Topics - Local and State Government