Most of us get refund checks at tax time. And most of the time, those refunds are just what we had been eagerly awaiting.
But occasionally, the amount on an IRS check is not what we expected.
In some cases, it's less than we figured on our 1040s. Every now and then, it's more.
Regardless of whether the refund discrepancy goes against you or favors you, some steps can be taken to resolve the matter. That way, even if you and the tax collector aren't necessarily satisfied with the eventual amount, you'll at least understand the mathematical misinterpretation.
Explanation en route
First, don't panic. There's usually a logical explanation for why you and the Internal Revenue Service came up with different numbers.
The IRS will send you a written explanation for the unexpected amount. The only problem is that the explanation doesn't always accompany the check. Such coordination of cash and comment is particularly difficult with directly deposited refunds, which are likely to show up unexplained in your account first.
Why your refund might be an unexpected amount:
- Math errors made in computing your tax bill.
- Incorrect credit or deduction claims were made.
- Estimated tax payments not credited properly.
- Other federal debts, such as a student loan, are collected.
"Sometimes the letter comes first," says Beth Wiggins, CPA and retired partner at BKD LLP in Houston. "Sometimes it follows a few days later. If the check comes first, you can always call the IRS."
The main IRS toll-free number is (800) 829-1040 or (800) 829-4059 (TDD) for the hearing impaired. You also can call or visit your local Taxpayer Assistance Center. The IRS Web site has an interactive locator page to help you find the nearest one.
Wiggins says she's discovered the best time to call is about an hour before the IRS office is scheduled to close. "Mornings are not a good time to call," she says. And during tax-filing season, you'll probably be in for a wait on hold at any time of the day.
Cash or hold the check?
As you're waiting for the explanation letter to clear up the refund issue, you also have to decide what to do with the more, or less, money you got.
"It's usually not a problem to cash it, especially if it's a smaller difference" says Bob D. Scharin, senior tax analyst, the Tax & Accounting business of Thomson Reuters.
In fact, if the check is less than you expected and it turns out that you were correct, once you and the IRS resolve the matter in your favor, the agency will make up the difference (plus a bit of interest if it takes more than 45 days to correct the error) and send you another check for the balance due.
If, however, the difference is larger or your refund is much more than you believe you should have received, it's generally a good idea to hold off cashing the check until the issue is resolved.
"Recognize that you could be asked to send it back if the amount is more than you expected," says Scharin. That's easier to do if you still have all the IRS's mistakenly refunded money in hand.
Documentation of the difference
Once you get the official word on why your refund is not what you had expected, it's time to figure out what happened.
A typical notice will show you some basic 1040 information: adjusted gross income, taxable income and total tax due. In each of these categories, the IRS will indicate what you entered and what the agency came up with. A major difference in one of these areas will pretty clearly show you where the problem lies.
The document should also note how much tax you paid and any over- or underpayment. Additional charges or credits, such as interest and penalties, also are taken into account.
"Get out your return and try to reconcile it that way," says Scharin. If you used a tax professional to file your return, call that person for help in clearing up the matter.
In many cases, the notice will include a phone number. Scharin says a personal inquiry directly to the IRS could also help.
"You might want to call before sending documentation," he says. "You might find in speaking with a person, any confusion is cleared up, for good or otherwise." At least you'll know exactly what the agency needs from you to resolve the issue.
Common refund discrepancy causes
"Most likely it is an arithmetic error," says Scharin. In these cases, the IRS simply corrects your calculations and sends you the proper refund amount.
Even tax software doesn't make you immune to addition and subtraction issues.
Scharin recalls one individual who "did his taxes on a computer and forgot to press 'recompute.' So even though he entered in everything correctly, he didn't finish the process."
You also might have claimed something that, based on your income, you're not entitled to, says Scharin. "Income phase-outs, based on your adjusted gross income, affect several credits," he says.
But it just as easily could be an IRS error.
"You may have made estimated tax payments, and one was not credited properly," says Scharin. "From your records, you overpaid or paid properly, but the IRS doesn't think so. So send them a copy of the canceled check."
Wiggins also has found estimated tax payments to be a major culprit in divergent refund amounts.
"Usually, the tax due is calculated correctly, but the filer and IRS come up with a difference on the amount of tax paid," Wiggins says. "You made $250 in estimated payments when it was only $225 on the form. We can match those up because they show those payments on the letter of explanation."
Other numbers that cause problems are those nine Social Security digits. When any of those are wrong (such as transposed numbers, or they don't match other records, perhaps involving name changes after marriage or adoption), problems with your tax return -- and refund -- appear.
"I've seen refund issues recently when names of dependents don't match Social Security numbers," says Wiggins. "Husbands and wives have different names, as do their children. For example, you're Kay Bell, married to John Smith and your child's last name is Bell-Smith."
"If it's just listed on the return as 'Smith,' in these cases the IRS disallows the dependency exemption because of the mismatch."
Other debts collected from refunds
Your tax check also might be a direct path to other money you owe.
The government can go through your federal refund to collect if you owe money to other government agencies. The most common cases involve court-ordered financial payments associated with a former marriage or unpaid student loans.
"If there are any child or spousal support payments, then the county of residence can go and claim their payments from your refund," says Wiggins. "And it's not an issue here in Texas, but in other states, tax officials there can go after your federal refund for state income tax debts."
The IRS will even make sure it gets prior federal tax debts that you didn't clear.
"I also have seen cases where taxpayers have a payment arrangement in place with the IRS, and the agency collects from the filer's current refund," says Wiggins. "The agreement says they can apply any refund you have against what you owe.
"So even if you're making timely payments on your agreement with IRS, they can still apply the refund to that prior debt."
Self-correcting your mistakes
In a worst-case scenario, you might not even get a refund.
"You'll get a letter telling you to refile," says Scharin.
You also should refile your return and refigure your tax bill and any refund if you find a mistake that the IRS overlooked in processing. If the IRS does eventually notice the error, you'll face penalties and interest on the amount you didn't properly pay on time.
In these cases, file an amended return, Form 1040X, and send the original, incorrect refund check back to the agency.
The IRS says to include a letter of explanation with the check. The agency will issue you a refund for the proper amount when it processes your amended return.
On the back of the check where you normally would endorse it, write "void." Send the check and your letter detailing why you're sending back the check. Be sure to include your name, Social Security number, mailing address and a daytime telephone number in case an agent needs to follow up with you.
Send the check back to the issuing center; you'll find that location on the front of the check. Before you drop it in the mail, make a copy of the check and your letter for your files. It's a good idea to send the material with a return receipt for additional verification for your records.
You also can call the IRS's toll-free number and ask to speak to taxpayer accounts. Explain that the original refund check has been returned uncashed so the agency will know why it's issuing you a second refund.
It's no fun to return tax cash, but by making sure you get your payment and refund records straight, you'll know you won't have to worry about unexpectedly hearing from the IRS in the future.