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  • Unexpected refund after paying additional taxes

    I found myself in an unexpected situation and I'm wondering if anyone has encountered something similar.

    I do my own taxes in Turbotax. This year I found I owed an extra ~18k of federal taxes. (I thought we should be withholding extra federal income tax but it was difficult to calculate exactly how much, and I knew I'd be within the safe harbor, hence the big bill.)

    I paid those taxes last week. This morning I awoke to find a ~7k deposit from the IRS. Is this the IRS telling me I overpaid? A scam? Something else?

    Additionally complicating things, my 2020 taxes are still not officially filed. As best I can tell, our old nanny payroll company paid our estimated taxes but submitted them in an odd fashion, via 940/941. This lead the IRS to request additional documentation from us, which I submitted 9 months ago... and they still haven't gotten around to processing it. (In fact, I called their hotline every two weeks for 7 months before finally reaching someone in December who confirmed that yes, they had received my information, but they were just too short-staffed to process it.) However, I was only due a ~1k refund from that year so I don't think today's deposit is related to 2020.

  • #2
    The household employment taxes get reported on Schedule H of your individual tax return. If your nanny payroll company paid estimated taxes on your behalf to cover the household employment taxes, those estimated payments should have been reported on your 1040. If the estimated payments were omitted from the tax return, the IRS will refund the payment amounts shortly after processing your tax return.

    Whenever the IRS issues an unexpected refund soon after the tax return is filed, the first place to look for an explanation is tax withholding or more likely estimated tax payments that were paid but not fully reported on the tax return. So that is my guess as to what happened in your case.

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    • #3
      Thank you for the thoughtful reply.

      I finally received a letter from the IRS clarifying - the deposit happened to be my 2020 refund finally getting processed. Strange timing, but it was the best news I could have hoped for. Glad to have that behind me.

      Now I just need to figure out how my number was so different than theirs...

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      • #4
        Originally posted by SpacemanSpiff12 View Post
        Thank you for the thoughtful reply.

        I finally received a letter from the IRS clarifying - the deposit happened to be my 2020 refund finally getting processed. Strange timing, but it was the best news I could have hoped for. Glad to have that behind me.

        Now I just need to figure out how my number was so different than theirs...
        This will be a good education in how taxes are really calculated, as you will have to think through how TT uses your inputs and compare to IRS results. I bet you even enjoy it, at least a little bit.

        And be aware that errors do not always occur on the preparer side - the IRS’s error rate has increased since COVID has caused massive manpower shortages in their system and computers have taken over more of the work. So don’t go into this exercise assuming the fault is yours and only looking for what you did wrong, as that may not be the case. Good luck!
        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          Originally posted by jfoxcpacfp View Post

          This will be a good education in how taxes are really calculated, as you will have to think through how TT uses your inputs and compare to IRS results. I bet you even enjoy it, at least a little bit.

          And be aware that errors do not always occur on the preparer side - the IRS’s error rate has increased since COVID has caused massive manpower shortages in their system and computers have taken over more of the work. So don’t go into this exercise assuming the fault is yours and only looking for what you did wrong, as that may not be the case. Good luck!
          If it was actually an IRS error, can they come back and reclaim the funds? It would seem all they would need to do was initiate and "audit", result is you owe more taxes.

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          • #6
            Originally posted by Tim View Post

            If it was actually an IRS error, can they come back and reclaim the funds? It would seem all they would need to do was initiate and "audit", result is you owe more taxes.
            In the case of IRS error, typically writing a letter and providing appropriate evidence is enough to get it corrected. Of course, some of our clients have been waiting 1 yr+ to get processed. And we have a few who are still waiting on their 2020 refunds. COVID has really got the IRS down on their knees. They are even outsourcing to collection agencies now.

            In your case, yes, if the IRS erroneously refunded you money, you can expect to pay it back. So set it aside until you have gone through your exercise of tracking down all of the numbers and calc’s on your return. And, if they did indeed give you the money by mistake, I’m not sure what the next steps are with the IRS so backlogged. I truly don’t know right now with them so backlogged if it would be better to send the money back and hope they processed it correctly or wait for them to catch up with you. Or see the section in IRS Topic No. 152, Not Entitled to Refund Received, and follow their instructions/suggestions (I have not read through the referenced Topic No. 161, but I’d recommend you do so).
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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            • #7
              Call me crazy, but I’m happy to let it rest. I have no reason to believe the IRS made an error. The order of events was:

              1) I submitted my taxes in February 2021.
              2) IRS requested resubmission of information in ~May 2021, which I promptly delivered.
              3) i heard nothing from them for seven months, despite calling every other week. It took me a dozen phone calls and half a year to speak with a human on the phone. They confirmed they received my additional documents and there was nothing for me to do.
              4) The IRS reviewed all of my information and made a final determination about my refund.

              The IRS is the final arbiter of truth, not me.

              I have no desire to voluntarily reopen Pandora’s box without a compelling reason. This isn’t crazy, right?

              Thank you both for your thoughts.

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              • #8
                Originally posted by Tim View Post

                If it was actually an IRS error, can they come back and reclaim the funds? It would seem all they would need to do was initiate and "audit", result is you owe more taxes.
                Semantics, maybe, but the link I provided should answer your question. Absolutely, yes, if the IRS sends you a check in error, it is not yours to keep.
                Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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                • #9
                  Originally posted by SpacemanSpiff12 View Post
                  Call me crazy, but I’m happy to let it rest. I have no reason to believe the IRS made an error. The order of events was:

                  1) I submitted my taxes in February 2021.
                  2) IRS requested resubmission of information in ~May 2021, which I promptly delivered.
                  3) i heard nothing from them for seven months, despite calling every other week. It took me a dozen phone calls and half a year to speak with a human on the phone. They confirmed they received my additional documents and there was nothing for me to do.
                  4) The IRS reviewed all of my information and made a final determination about my refund.

                  The IRS is the final arbiter of truth, not me.

                  I have no desire to voluntarily reopen Pandora’s box without a compelling reason. This isn’t crazy, right?

                  Thank you both for your thoughts.
                  Well, I'm not going to call you crazy by any means. My job was simply to inform you of the legalities should the IRS have issued a refund in error. That does not mean that:
                  • this was an error or that
                  • the IRS will catch the error, if it was an error (but I would expect them to).
                  If they did send you $7k by mistake and they come after it, this is not a hill I would recommend you choose to die on. It will be a lot messier than you taking the time to figure out now if it is a mistake and you will still go down in the end.
                  Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                  Comment


                  • #10
                    Originally posted by jfoxcpacfp View Post

                    Well, I'm not going to call you crazy by any means. My job was simply to inform you of the legalities should the IRS have issued a refund in error. That does not mean that:
                    • this was an error or that
                    • the IRS will catch the error, if it was an error (but I would expect them to).
                    If they did send you $7k by mistake and they come after it, this is not a hill I would recommend you choose to die on. It will be a lot messier than you taking the time to figure out now if it is a mistake and you will still go down in the end.
                    Totally agree. Thanks for this perspective. You’re also right that I will enjoy comparing my TT return to the updated 1040 they send

                    In my early 20s I had to sort out an old tax mistake and it was an absolute nightmare. I was living and working abroad, and was out of the country for >330 days, so I didn’t have to pay federal taxes. I did not realize this also made me ineligible for a Roth IRA contribution. I didn’t discover this mistake for about 2-3 years, and had to update old forms and pay back taxes and fees with money that I did not have.

                    It definitely gave me an appreciation for getting things done right at the time!

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                    • #11
                      Originally posted by SpacemanSpiff12 View Post
                      Thank you for the thoughtful reply.

                      I finally received a letter from the IRS clarifying - the deposit happened to be my 2020 refund finally getting processed. Strange timing, but it was the best news I could have hoped for. Glad to have that behind me.

                      Now I just need to figure out how my number was so different than theirs...
                      The nanny payroll company should not have filed Form 941. Did you file Schedule H with your 2020 individual tax return? If so, is the sum of line 2a plus line 4 of Schedule H (plus perhaps some interest) approximately equal to the amount of your unexpected additional federal tax refund? If so, then the 941 filing caused your 2020 household employee taxes to be double-paid and the additional refund very likely represents a return of the double payment.
                      Last edited by MarkNYC; 04-30-2022, 08:04 AM.

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                      • #12
                        Originally posted by MarkNYC View Post

                        The nanny payroll company should not have filed Form 941. Did you file Schedule H with your 2020 individual tax return? If so, is the sum of line 2a plus line 4 of Schedule H (plus perhaps some interest) approximately equal to the amount of your unexpected additional federal tax refund? If so, then the 941 filing caused your 2020 household employee taxes to be double-paid and the additional refund very likely represents a return of the double payment.
                        That is an excellent point. We get 941s from nanny payroll companies but they may simply be mock-ups to help with income tax filing (Laura and Ashley are the experts in this area, not me by a long shot). The key takeaway is that we report tax liabilities on sch H but also report the quarterly payroll taxes that were paid in as “estimated taxes”, which zeroes out the liability. Of course, need to report the payments on 2441 for your Childcare Tax Credit.

                        Again, I do only the reviews to make sure the trx are reported correctly and do not advise on nanny payroll issues, so grain of salt there. But it is certainly possible that SMSpiff may have doubled up on 941 taxes if s/he filed quarterly 941s and did not report quarterly p/r tax deposits as estimated pmts.

                        I think the big issue with sch H reporting for HH employees is that the added tax liabilities have the potential to pull you out of safe harbor, causing late payment penalties due to underpd quarterly estimates.
                        Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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