Taxable Talk

Clients of ours filed their tax returns 15 days ago, and this morning received their refund from the IRS. They were expecting $523 and they got that, and just a bit more: The direct deposit was $3,523!

The clients had already looked at their return, and it showed $523 as the refund amount (and I pulled it up, and verified that). We looked at the IRS’s Where’s My Refund website and it shows $3,523. My clients called the bank and verified that the refund that was deposited was $3,523.

My clients are not entitled to the extra $3,000. As much as they’d like to keep the money, that’s not allowed. And it’s clearly an error. Their return is straightforward (they’re retired, and they received the same 1099-R’s and social security as in past years). There’s no new 1099-R with an extra $3,000 of withholding. (We also both double-checked the withholding amounts on the return, and they are correct.)

The IRS does have guidance on what to do in this situation: Tax Topic 161 covers an erroneous refund. In case of a direct deposit, you contact your bank’s ACH department and have them return the funds. You also must call the IRS and explain what’s happened. Additionally, there should be a letter issued by the IRS sent to you as to why the IRS changed the refund amount. We’re going to allow a week for that letter to show up, but come next Monday the clients will be returning the funds.

Unfortunately, as of today there’s no way for the clients to call the IRS up and explain what’s happened (all IRS phone lines are down). If they were to mail a letter, it might be months before someone reads it. All they can do is call the IRS up when phone lines reopen.

By the way, suppose you receive someone else’s refund; can you keep the money? No, that’s likely theft. Indeed, there have been prosecutions when this has happened. There almost always is no free money.

In May, 2019 clients amended their 2016-2018 returns. They had forgotten to tell me about a spousal nondeductible IRA contribution. We amended, included Form 5329 for each year, and expected to receive letters noting that the IRS made the changes. It wasn’t a big deal, and there was no rush in the IRS processing the amended returns. The IRS sent back letters noting 2016 and 2018 were processed (with no change to the taxpayers’ income). However, the IRS made an error when they processed 2017. Somehow a $5,500 nondeductible IRA contribution caused my clients to owe $198,500 in tax!

Now, we knew it was an error made by the IRS. So we sent a letter to the IRS pointing this out (it was sent on August 13, 2019). We also had to call the IRS up twice to stop collection activity on the ‘balance’ that was created by the misprocessing. The IRS finally resolved the situation last month (March 2020), seven months after we wrote them. (The IRS even said in the letter, “We apologize for the error.”) That’s a long time to get an initial response from the IRS.

I bring this up not because of the error but because of the current Covid situation. All IRS phone lines have been shut down. The IRS CAF unit is shut down, so tax professionals can’t send Powers of Attorney or Tax Information Authorizations. Mail is not being picked up by the IRS.

Remember the government shutdown of late 2018 to early 2019? Estimates were that it would take the IRS up to a year to recover from that. This shutdown will likely last two months (perhaps longer), and I suspect it will take many months for the IRS to recover. I have many authorizations to send to the IRS. (The CAF unit was taking weeks before the shutdown; I expect we’re now looking at months for processing. This will increase the call volume at the Practitioner Priority Service (PPS), the unit tax professionals call when dealing with the IRS.) Add in the extra thousands (at least tens of thousands) of calls dealing with the stimulus checks. Phone lines will be very backed up when the IRS reopens.

The problem is that IRS deadlines have deadlines on responses, and there are statutory deadlines. I have a client who has a 2017 correspondence audit. We sent the reply in late March. The reply, sent certified mail (but not return receipt requested), is waiting for the IRS to pick it up in Holtsville, New York. Let’s say that service center reopens in mid-May. Who knows when someone will actually read the response?

So let’s assume the IRS reads it, and denies our response, and sends us a notice around Thanksgiving (which isn’t that unreasonable). We send another response, received around Christmas…and not read until late March 2021. We now hit another deadline–the statutory deadline of April 15, 2021. So it’s likely the IRS would simply issue a Notice of Deficiency.

(For the actual correspondence audit, I don’t expect this as the matter is straightforward, and we included all the required documentation.)

Unfortunately, there are numerous matters with the IRS that can only be responded to by mail. I have another response I sent in August 2019 that has yet to be responded to.

There’s no blame to the IRS here, of course (everyone’s health is paramount). That said, we will all need patience. Representation is going to be very challenging for the rest of 2020.

Normally, we tell clients to use certified mail, return receipt requested. For now, do not use return receipt for mail you send to the IRS. (Do continue to use certified mail, though.) There’s no one to sign for your paperwork, so your correspondence could be returned to you if you use return receipt.

The rest of 2020 will not be fun when we’re dealing with the IRS.