Even though we are in the midst of the coronavirus pandemic, and the tax filing deadline has been pushed back, millions of Americans who are required to file their tax returns will get a surprise from the IRS.
These folks may send in their returns thinking that in a short while they’ll get a refund check or bank deposit. But instead the IRS sends them a notice. That notice will explain that the government for some reason is keeping some or all of their anticipated refund.
This article will look at how this can happen, and what you can do about it.
Possible Reasons for an IRS Notice
There are a number of reasons why the IRS may withhold or reduce your tax refund. Some are fairly benign, while others will require some work on your part.
You or your spouse owe federal or state taxes. The fact that you still owe taxes is the main reason the IRS is holding onto or reducing the amount of your tax refund this year. And if your spouse owed taxes before you were married, the government can legally use your joint refund to pay for those past taxes. If you owe the IRS or state government money, you’ll need to determine the following:
- The amount of taxes that you owe;
- If the IRS or state revenue department has calculated the tax correctly;
- If you have any options to lessen your tax liability; and
- Whether there are penalties and interest that are also due.
If the IRS held onto your joint refund to pay for your spouse’s pre-marital tax debt, you may ask for the return of your portion of the tax refund with an injured spouse claim.
You or your spouse owe other types of debt. The IRS can use all or some of your refund to pay for certain other debts, including delinquent child support, late student loan debt, and back unemployment compensation that shouldn’t have been paid. If you owe another government agency, contact the agency directly. In addition, you can again file an injured spouse claim to have your part of a joint refund returned if it was taken to pay these other types of debt and that debt belongs only to your spouse.
The IRS believes that you made a mistake on your return. The IRS can make some modifications to your return if it thinks there’s an error. If your return has an inconsistency, the IRS may change your return and send you a notice. In some case, this is something very minor like a mismatched Social Security Number.
The IRS is reviewing your tax return to determine if you qualify for a credit or deduction. The IRS can hold your refund and send you a notice requesting proof that you qualify for a credit or deduction you claimed. This frequently is the case with the Earned Income Credit (EIC), when two people (such as former spouses) both claim the same child as a dependent. Another example is tax identity theft (see below). Give the IRS the information it needs ASAP.
You were a victim of tax identity theft. The IRS may send you a notice to verify that a return filed using your SSN is legitimate. If the return was yours, you should reply to the notice so the IRS can process your return and issue your refund. It is wasn’t, reply to the IRS by verifying your identity and making certain that they process the return that you filed instead of the fraudulent one.
The IRS is investigating another one of your returns. If the IRS has opened a delinquent return investigation or has begun an audit of a return you filed previously, it may freeze your refund until that process is done. If you owe taxes because of one of these issues, the IRS will apply your refund toward the taxes you owe. If you don’t owe any taxes, it will release your refund after it ends the investigation or audit.
What to Do If You Receive a Notice from the IRS
The IRS mails millions of letters to taxpayers each year for many reasons. Consider these tips and suggestions if you get one:
Don’t ignore the notice. Most IRS letters and notices concern a specific issue and include specific instructions on what you need to do. Open any IRS letter right away and respond by the due date for the best result.
Take timely action. Again, respond right away to decrease the accumulation of additional interest and penalty charges.
Review the information in the notice. If you get a letter concerning a changed or corrected tax return, review the information and compare it with your original return. If you agree, note the corrections on your personal copy of the tax return, and keep it for your records.
Don’t reply unless directed to do so. There’s usually no need for a taxpayer to reply to a notice unless specifically instructed to do so. However, taxpayers who owe money should reply promptly with payment.
If you receive an IRS tax notice, above all, don’t panic. The IRS and its authorized private collection agencies will deliver letters via the U.S. mail… it’s not uncommon, and in many instances, all you need to do is read the letter thoroughly and take the appropriate action.
Contact an experienced tax attorney for help in resolving your tax issue.
For more information on this and other tax matters, consult the IRS or a qualified tax professional.