Unexpected refund

[Margaret CPA in OH]

I manage affairs for a client who has received a totally unexpected refund check from IRS for 2011 for $2500. I have triple checked every single thing that I can find on this return and am absolutely baffled as to the source of this. Of course there was no explanation, just the check. First time for me - any suggestions? I don't plan on advising deposit any time soon.

[B. Jani]

The only thing i can think of is any estimated payments were made and forgot to include.

[ILLMAS]

Best thing I can suggest is to call the IRS and find out why, just be prepared to be on hold for a while.

[Margaret CPA in OH]

Thanks for the replies. I checked the check register and copies of vouchers for estimated payments so don't think that's it. Call? What number - the 1040 line? You are correct, I may as well dedicate my second line for the day! That may be my only true option though. Sigh...

[JohnH]

I suppose you've ruled out a $2,500 overpayment from the prior year being applied to current year estimated tax. And you've ruled out withholding that was missed.

Did you look at the checks themselves? It's possible a check was processed for an amount different that what it was written for, or the numeric entry and the handwritten entry on the check are different. It's amazing how many people don't balance their check books.

I can't think of how a $2,500 error could result from a misplaced decimal, but maybe I'm not guessing right. (For example, $2,700 would result from a $300 check being processed as $3,000) If you want to post the amounts of the estimated tax payments, maybe a possible error would jump out and give you a place to focus.

[OldJack]

Why on earth would you call the IRS. Advise the client to deposit the check, but don't spend it until after 3 years. Do you guys think you are IRS agents?

[Margaret CPA in OH]

Okay, I have checked all of that, JohnH. There was actually a balance due for 2010. The checks were all written on a trust account which was reconciled monthly as to amounts. The estimated payments were $5500 in September and $5500 in December (extended return). Final tax liability was $4334 and I applied the $6666 overpayment to 2012. She receives only an annuity with no withholdings, divs and interest from revocable trust (no withholdings) and K-1 from CRUT (no withholdings) and Social Security (no withholding.

She will be 99 in December and I don't want to have to deal with more than her estate, the CRUT and final return so would really like to get this $2500 issue resolved. I'm not an IRS agent, OldJack, but I do manage her finances. I simply cannot figure what this could be. I am not perfect but in about 15 years of doing some rather complex returns for her and her late husband, this anomaly is a first.

I'll be on the phone unless something comes to me in my dreams. Thanks, meanwhile, for the suggestions!

[OldJack]

Did you check 1040 Sch-R, Credit for the Elderly or the Disabled ?

[Margaret CPA in OH]

To be honest, I did not check that because her AGI is $182,920. I don't think any of my clients have low enough income to qualify and I do run the diagnostics. But I confess - I didn't on this one. Still open for any possibilities, though. Thanks!

[JohnH]

I'm out of ideas as well (unless there was a state estimated tax payment which was accidentally sent to IRS, but that would probably have shown up already via a state underpayment notice).

Generally I'd be inclined to follow Jack's approach to cash the check and then forget about it until 3 years elapse, but given all the other info you provided I can see why you feel you need to get a resolution to this.

[SaraEA]

Differences in prior year estimates (that you didn't know about) may have occurred and been applied automatically to the following year.. Like you entered that the client made 10k in estimates, when she actually made $15k, and you told the IRS to apply the overpayment. More got applied than you knew about, but sometimes the IRS refunds the money rather than apply it. Clients don't always share the correspondence with you, so you have no way of knowing. We have one client who has had this happen for three years in a row. I put a note in the file that this year we want the exact dates and amounts of estimates before I enter anything.

Another client has a student whose 1098T included an amount for an adjustment for the prior year. I did what I was supposed to, went back to the prior year, recalculated the education credit, and recaptured the excess credit on the current year tax return. The IRS sent him a check for the recaptured amount. The return was efiled, so there was no way a data input processor was to blame. He said he intends to cash the check, and I told him to go for it. If the IRS ever discovers their error, they better be too embarrassed to ask for the money back.

[jainen]

>>I'm out of ideas<<

This has been my favorite thread in quite a while! Nobody ever had any ideas, at least nothing based on any relevant fact. And even an argument about whether to find out the relevant facts--an Internet troll's delight!

[joanmcq]

Why not go on eservices to check on the client's account. Get a POA. Check both this year's and last year's.

If you 'cash the check and wait for 3 years', if the check is in error, you've got interest due. Holding the check a few days to check the IRS account isn't going to hurt anything.

[JohnH]

>>I'm out of ideas<<

This has been my favorite thread in quite a while! Nobody ever had any ideas, at least nothing based on any relevant fact. And even an argument about whether to find out the relevant facts--an Internet troll's delight!

I agree to the extent that you did a great job of illustrating your point.

Nothing useful to add, no ideas of your own, just a snarky comment denigrating everyone else in the thread who are just trying to help out a friend.

Congratulations on demonstrating a fine example of an "internet troll" comment..

[Lion EA]

I've seen explanatory letters arrive a few days after unexpected checks. Do go on e-services with a POA.

[Catherine]

I had a client get one of these checks last year. We tracked it down ourselves and the amount was very close to that of an estimated tax payment they had made -- which they did owe.

I advised them to hold on to the check for a couple of weeks before cashing it. Sure enough, a couple of weeks later a bill arrived from the IRS for the amount of the check, PLUS penalties and interest, for the "underpayment." We sent them back the original check with a letter requesting that penalties and interest be abated as the IRS had indeed had the funds and that the taxpayers did not cash the check that was sent to them in error by the IRS.

Another letter came another several weeks later, abating penalties and interest and re-crediting the returned overpayment check.

So, you may have done everything right and the check may well have been sent to your clients in error. I advise waiting until a few weeks before the check becomes outdated before cashing it. But put a reminder in _your_ calendar to check in with your clients then, as they will almost certainly forget if no letters are received by then.

[Jack from Ohio]

Everyone is OVERTHINKING!!!!

1. Have client deposit check into savings and keep it. We recommend the client buy a 3 year CD. (sending checks back confuses the daylights out of the IRS. NOT RECOMMENDED)

2. Wait 14 days for an explanation letter.

3. Wait up to three years for IRS to send a notice asking for it back.

4. If the source is keeping you up at night, get an account transcript for the years it may have come from

5. Take a long slow breath and relax!!

[Margaret CPA in OH]

Thanks again, all. It's good to know there is a variety of opinions and options to address this issue. I especially appreciate the slow down and relax choice! Then I will check e-services as I already have POA.

What I will not do is is have a 98 1/2 year old client invest in a 3 year cd. The check is actually good for one year so it seems I do have some time to pursue avenues and recheck all my rechecks on checks, data entry, etc. Based on Catherine's experience, I'm betting that is the situation. If I remember to do so, when I get to the bottom of this mystery, I will share.

[Jack from Ohio]

She should still cash the check and hold the money. Simpler to repay. I have had nightmares when sending checks back to the IRS.

[JohnH]

I agree with Jack. I've never seen a good outcome when someone returned a check to IRS.

[joanmcq]

If she cashes it, she will owe the interest & penalties if it was sent in error. I would never recommend just cashing an unexpected refund. A letter will come explaining the change if she made more in estimated payments "We have adjusted your refund".

[Jack from Ohio]

If it was sent in error, the penalties and interest will be abated. First hand experience here.

[kcjenkins]

I'm with Jack and John on this part. If you return the check but they "lose" it, you have no proof at all that you sent it. Registered mail does not prove WHAT was in the mail. Sure, they have no proof that you cashed it, but since they have all the power, they expect YOU to prove that you did not, On the other hand, if you cash it and put it into a savings account,, AND you keep copies of all the correspondence where you try to clear it up, I've never had any problem getting them to abate any penalties. If you do hold it until you are certain that it is not a proper refund, then return the check at a local IRS office, in person, and get written confirmation from them that you did, signed and dated, Paranoid? Maybe, but based on real-life experience.

[Catherine]

Everyone is OVERTHINKING!!!!

1. Have client deposit check into savings and keep it. We recommend the client buy a 3 year CD. (sending checks back confuses the daylights out of the IRS. NOT RECOMMENDED)

<snip>

Jack -- quick clarification. I did NOT recommend sending the check back by itself! I recommended sending it back WITH a letter AND a copy of their (potential) bill/demand/notice if it turned out to be an error.

By doing that, they then revoke the imposition of penalty and interest, as the taxpayer never took the money back.

That's all. Sending back an uncashed check with no IRS letter, no explanatory letter, just because you're not sure you should have gotten it? No way!

Catherine

[Margaret CPA in OH]

Catherine, I of course understood that as I am sure did Jack. We folks sort of overdocument with belt and suspenders to cover all sides of us! I'm still in the pause mode to see if anything shows up by week's end then will begin other actions. I really don't feel rushed, just confused!