It’s unusual that the IRS generates a tax refund check by mistake but it does happen. And when it does, you might want to consider the consequences of cashing in on your lucky day. Do you need to pay it back to the IRS? (The answer should be simple.) When might you need to return the money to the IRS? Can you be charged with wrongdoing if you used the money? Will you incur any penalties or interest?
A Tax Refund Sent in Error Must be Paid Back to the IRS
If you know or have a good reason to believe that a tax refund was sent to you in error, you should hold off cashing the check. You should first contact the IRS to discuss the matter and confirm that the check is proper in all respects. A a tax refund sent to a taxpayer by mistake must be returned or repaid to the IRS. You don’t have to wait until the IRS realizes its mistake and contacts you. Responding in a timely fashion will mean that you almost certainly won’t be responsible to pay any penalties or interest.
According to the IRS Internal Revenue Manual (IRM), upon receiving the Letter 510C, Refund in Error; Return Check, the taxpayer has until the 21st day from the date of the letter to either (i) return the refund check or (ii) repay the amount to the IRS. (See IRS, IRM Part 21. Customer Account Services, Chapter 4. Refund Inquiries, Section 5. Erroneous Refunds, Subsection 18.104.22.168 (10-01-2013) Account Actions for Category D Erroneous Refunds, number 8)
Interest and Penalties Depend Upon Fault
Fairness dictates that taxpayers are not liable for penalties and interest on erroneous refunds until the IRS asks the taxpayer for repayment. But this is contingent upon the presence of both of the following:
If the taxpayer caused the error, intentionally or not, interest will be assessed from the date the refund was issued. For example, let us assume that you inflated your deductions in excess of what was permitted so as to cause a refund check to be issued. When the IRS discovers the error, whether or not it was made intentionally, you could be liable to pay interest on the amount of the refund until it is repaid to the IRS.
- The IRS must be clearly at fault in generating the erroneous refund; and
- the amount of the refund cannot be greater than $50,000.
Tax Returns Dealing With a Tax Refund Check Sent in Error
By Michael Wechsler |
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