The IRS is taking my Refund - What can I do?

March 25, 2022 by Jean Lee Scherkey, EA
refund written with blocks

The IRS is claiming unreported income for the year 2016. Because of that, they have come up with some ungodly amount of payment from me. They have taken every return refund since 2019 from me. $5,018 so far. This year I have a 8,000 refund, in which they are working on confiscating at this moment. I have on many occasions called and mailed and no resolution. They are not interested in settling the matter they want this cash cow till death. What can I do?

-Robert, Oklahoma



Dear Robert,

There is no way around it. Tax troubles tend to turn taxpayers topsy turvy. This is especially true when tax issues turn into collection actions such as levies on bank accounts, wage garnishments, or refund offsets, like the ones you are experiencing. It is enough for anyone to yell “tarnation!” and turn towards tranquil pastures. But don’t pack your suitcase just yet – let’s see if we can try to take the tangles out of this tribulation.

First, we need some basic information. Why was the tax assessed in the first place, and is it correct? How much tax is actually owed versus penalties and interest? How much has the IRS collected to date? When was the tax assessed, and how much time is left on the collection statute of limitations?

One way to find out the whys, when, and how much is by requesting a couple of transcripts from the IRS. There are several types of IRS transcripts available at no cost. Having a basic understanding of the situation puts taxpayers in a stronger position when it comes time to contact the IRS. Before a taxpayer can access any of the above transcripts using the IRS online function, the taxpayer will need to create an online account.

Below is a summary of the transcripts available online and by mail.

 

  • Tax Return Transcript: Provides most line data from the taxpayer’s originally filed return. This transcript is especially helpful when taxpayers do not have a copy of their submitted return. Key figures from the originally filed return are listed, such as total income reported, adjusted gross income, total tax, federal withholding, and whether the taxpayer claimed the standard deduction or itemized. This transcript is available for the current tax year and three years prior, providing the taxpayer filed the return(s). The taxpayer’s spouse (known as the “secondary signer”) may access a copy of the Tax Return Transcript by using the Get Transcript Online or mailing Form 4506-T, Request for Transcript of Tax Return.

    Keep in mind that the Tax Return Transcript does not provide any information about the tax year beyond the submitted return. For example, this transcript does not provide the date the tax was assessed. Tax must be assessed before the IRS or state taxing agency can begin collection proceedings. Generally, the IRS must assess any additional tax due within three years from the date the taxpayer files the return. The three-year limit can be extended under certain circumstances. It is essential to know the assessment date as it is the beginning of the statute of limitations for collection purposes. This is when the IRS has to pursue collection enforcement on assessed tax that was not timely paid. Usually, the IRS has ten years from the date the tax is assessed to pursue collection. In most cases, once the ten-year period ends, the IRS may no longer continue collection actions, and any remaining tax due is “written off” by the IRS.
     
  • Tax Account Transcript: Provides general data such as the type of return filed, filing status, adjusted gross income, taxable income, and all payments that have been made. It does not show as many lines of the taxpayer’s filed return as the Tax Return Transcript does. This transcript is especially helpful because it provides a record of the activities that happened on the account after the return was filed, such as the date the tax was assessed. Other information includes any payments the taxpayer made or that were collected by the IRS through garnishment, levy, or offset and changes made to the tax return after the original return was filed. The Tax Account Transcript also records any penalties that have been assessed, if the return has been audited, etc. Unlike the Tax Return Transcript that can be ordered for the current and past three years, the Tax Account Transcript may be ordered online or by submitting Form 4506-T for the current tax year and the prior nine years. Because this transcript can be ordered for up to nine years prior, it is beneficial for taxpayers who have a collection case dating back more than three years. However, there is a caveat. The IRS Get Transcript Online service offers transcripts going back nine years, but a taxpayer may only request this transcript three years back through Get a Transcript by Mail or by calling the automated transcript telephone line (800-908-9946).
     
  • Record of Account Transcript: Combines the information contained on the Tax Return Transcript and Tax Account Transcript onto one report. This transcript is available online or by submitting Form 4506-T for the current year and three years prior.
     
  • Wage and Income Transcript: Provides information from all Forms W-2, 1099, 1098, Schedule K-1, and Form 5498, IRA Contribution Information, submitted to the IRS for the tax year. This transcript is available after July for the current tax year and nine years prior. This transcript is very helpful when a taxpayer never filed a prior year return that is required to be filed. It is also helpful for taxpayers who lost their records due to a natural disaster or other circumstance.
     
  • Verification of Non-filing Letter: This document is beneficial if there is any question whether the IRS has a record of Form 1040, 1040A, or 1040-EZ being filed. This letter does not indicate whether the taxpayer had a filing requirement but indicates whether a return was filed. It is generally available beginning after June 15 for the current tax year and three tax years prior. Taxpayers who need this letter for earlier tax years may submit Form 4506-T.

While the transcripts may not give you the entire picture, they may give you clues about what happened. For instance, you said the IRS is claiming there was unreported income for the year 2016. Do you recall filing a return for that year? If so, do you know if this income was reported? Sometimes income may have been reported, but not where the IRS is looking for it on the return. For example, a taxpayer may have received miscellaneous income they reported on their 2016 return, Line 21, “other income,” but the IRS looked for the income on Line 12, “business income.” Did you recognize the income, or was it in error? If the income is connected to a sole proprietorship, perhaps some deductible expenses may offset the tax due. Depending on how long it has been since the additional tax was assessed, you may be able to file an amended return and include any deductible expenses. Being from Oklahoma, perhaps the income derives from an interest in an oil or gas well? Generally, income from oil and gas interests may have depletion or administrative expenses that can offset the income from the activity and lower the overall tax.

If you never filed a return for the tax year in question, then the statute of limitations on assessment has not started. The IRS may have prepared a return on your behalf based on the information they received from third parties such as employers, banks, investments, etc. This return is known as a Substitute for Return (SFR). However, these returns do not consider if the taxpayer qualified to itemize their deductions or claim other tax breaks and credits. Once a substitute for return is filed, a taxpayer may submit an Audit Reconsideration. Special conditions must be met before a taxpayer may submit an audit reconsideration. This is a lengthy and sometimes complicated process, so the assistance of an experienced tax professional goes a long way. Even when the IRS prepares a substitute for return and tax is calculated, the statute of limitations assessing further tax still has not started. The only way the statute of limitations on assessment can start is when the taxpayer files a return. However, any tax calculated through a substitute for return does have an assessment date for collection purposes. The IRS will have ten years to collect the tax due like other tax debts.

What if you review everything and find out the additional tax is correct? Does this mean all is lost? Thankfully, even if the additional tax assessed is correct, a taxpayer still has many options. Once a taxpayer determines the total tax, how much of the tax due has already been paid, what penalties and interest are still due, and how long the IRS has to pursue collection activities, the taxpayer can review the options available. Perhaps an installment agreement can be arranged. If the taxpayer qualifies, they may be able to request an Offer in Compromise or be eligible for Innocent Spouse Relief. The COVID-19 pandemic has left many taxpayers financially devastated. For those who qualify, Currently Not Collectible status may be right for them. This can be a complicated procedure, and taxpayers who request this status must complete a Collection Information Statement.

It is essential to get into some agreement with the IRS as this will alleviate the concerns of the unknown and help the taxpayer know how much they genuinely owe and for how long the IRS can enforce payment. Unfortunately, under several of these payment options, a taxpayer’s refund may still be offset to pay down the tax still due. The good news is that the stimulus payments, also known as the Economic Impact Payments, may not be used to offset federal taxes due. However, the payments may still be used to pay back child or family support.

If all of the above sounds overwhelming, take heart! In a situation like yours, where you have contacted the IRS on several occasions with no resolution, sometimes you need a qualified tax professional to intercede on your behalf. A seasoned tax professional who understands IRS collection procedures can cut through the red tape and get to the heart of the issue. They can intercede when a taxpayer is experiencing garnishments, levies, and offsets. Depending on your circumstances, a tax professional may be able to abate some of the penalties that have been incurred.

The tax professionals at TaxAudit Tax Debt Resolution understand the collection process. With years of experience, they can navigate a taxpayer through the confusing and frustrating process of dealing with the IRS. In fact, TaxAudit has its tax relief services down to a science! You stated the IRS has already collected thousands of dollars in offsets. Using our four-step method to tax resolution, we can help determine what you genuinely owe and how much the IRS has collected so far. (Although uncommon, the IRS may have over-collected on a tax liability.)

A no-obligation, free initial consultation with one of our licensed tax professionals is just a click away!

Wishing you financial freedom and many happy returns,
Jean

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Jean Lee Scherkey, EA
Learning Content Developer

 

Jean Lee Scherkey began her career at TaxAudit in 2015, and her current title is Learning Content Developer. She became an Enrolled Agent in 2005. For several years, Jean owned a successful tax practice that specialized in individual, California and trust taxation, and assisting those impacted by tax identity theft. With over fifteen years of varied experience in the field of taxation, Jean has worked at different private tax firms as a Staff Practitioner, Tax Analyst, and Researcher. Before coming to TaxAudit, she worked over two years for TurboTax as an “Ask the Tax Expert.” In addition to her work in TaxAudit’s Learning and Development Department, Jean is actively involved in the company’s ENGAGE Volunteer Program, which provides opportunities for employees to help and serve the local community.  


 

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