Beware the Tax Refund Mistake In Your Favor

Some things are too good to be true. Unicorns. Godzilla. Going the speed limit during rush hour. And tax refund mistakes in your favor. If, by chance, you do see any of these, that red flag in the back of your head better be waving faster than a cheerleader’s fingers after drinking a case of Mountain Dew.

If you’re like most people, any extra money received from the government is seen as fair game. You fill out your return for a $500 refund and get $1000 back, that’s $500 more you have to spend on frivolous trinkets, right?

Creepy Doll

This one cost $500 PLUS your soul

Well, no, not necessarily. The tax code is complex enough that there’s a chance something was calculated wrong on your return, which could mean that money’s yours to keep. It happens. But the more likely situation is that the IRS screwed up.

Take the recent court case TC Memo 2014-118. Social Security income needs to be recorded on two lines: one line is your total income, the other line is your taxable income. The total income line is informational only, so leaving it blank won’t affect your return at all. The petitioners in the case did just that, leaving the total line blank, but reporting their taxable portion on the correct line.

When an intrepid IRS agent spotted the blank line, they assumed that the taxable amount was actually the total amount. They “helpfully” moved the taxable amount over, which reduced the taxable amount and gave the taxpayer a bigger refund by about $500.

The tax refund mistake in petitioners’ favor was eventually caught by the IRS, but not after the money was spent. The IRS came pounding down on the petitioners’ door, demanding the $500 back like the newspaper delivery boy from Better of Dead*. Petitioners took the IRS to court, hoping the court peel the IRS off their backs. Instead, the court sided with the IRS, insisting the petitioners give the IRS their two dollars five hundred dollars.

The petitioners got off easy, too–they only had to pay the money back. Sometimes the IRS will demand interest and penalties along with the erroneous payment.

I’ve seen this happen a time or two on a larger scale as well, where the tax refund mistake was closer to $2 million. Fortunately, the client had the sense to look the gift horse in the mouth before the money was spent.

Again, it’s not always a mistake on the IRS’s side. Sometimes you or your accountant screwed the pooch, and that money is legitimately yours. Just be sure of that before you spend it. If you need help figuring it out and you don’t have an accountant, you can try reaching our directly to the IRS. Once you endure the painfully repetitive hold music, the agents are typically pretty helpful.

*For anyone not privileged enough to have seen the cult classic:

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Picture by Jeffrey