Legal Definitions - equitable recoupment

Equitable recoupment is a legal principle that allows a party to offset a claim against another party, even if the statute of limitations would normally prevent that claim from being brought independently. This doctrine applies when two claims are closely related, typically arising from the same transaction or event, and it would be fundamentally unfair or unjust to allow one party to benefit while the other is time-barred from asserting a related defense or claim. It acts as a defensive measure, often used to reduce or eliminate an existing debt rather than to seek new monetary recovery.

Here are some examples illustrating equitable recoupment:

• Taxpayer Overpayment Offset: A small business owner mistakenly overpaid their state sales tax for several years due to a misinterpretation of a new regulation. Years later, the state tax authority audits a different tax year and determines the business owes additional income tax. The statute of limitations for the business to claim a refund for the overpaid sales tax has already passed.

  In this scenario, under equitable recoupment, the business owner could argue to offset the previously overpaid sales taxes against the newly assessed income tax liability. Even though the owner can no longer directly claim a refund for the old sales tax overpayments, it would be unfair for the state to collect new taxes while retaining an acknowledged overpayment from a closely related period of the business's overall tax obligations.

• Government Underpayment Offset: A large manufacturing company files for a significant refund of federal corporate income tax for the current year, having discovered an accounting error that led to an overpayment. During its review of the refund claim, the IRS discovers that the same accounting error, applied in a prior, time-barred year, resulted in the company underpaying its federal excise tax.

  The IRS could invoke equitable recoupment to reduce the company's current income tax refund by the amount of the previously uncollected excise tax. This prevents the company from receiving a full refund while simultaneously having benefited from an uncorrected underpayment from a related accounting issue, even though the IRS is legally barred from directly collecting the old excise tax debt.

• Contractual Debt Reduction: A software development firm sues a client for the final payment on a custom software project. The client, however, argues that the firm failed to deliver a critical component of the software, forcing the client to hire another developer to complete it at significant cost. The statute of limitations for the client to sue the original software firm for breach of contract has passed.

  The client could use equitable recoupment as a defense to reduce the amount owed for the final payment. Even though the client can no longer *sue* the firm for damages due to the time bar, the firm's failure to deliver arose from the very same software project for which it is now demanding payment. It would be inequitable to force the client to pay the full amount while ignoring the related, unaddressed failure by the firm within the same transaction.