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Big, unexpected IRS check? Don't cash it

The agency shows no mercy even if it erroneously sent the money in the first place.

By MSN Money Partner Jun 30, 2011 7:24PM

This post comes from Sally Herigstad of MSN Money.

 

I recently got a check I wasn't expecting from the Internal Revenue Service for $1,356. There was no explanation. A few days later, I got a letter from the IRS that was high on paper usage and low on actual information.

 

A Baltimore woman was in a similar situation, only worse: She received an unexpected check from the IRS for $40,000.What made it worse was that the check turned out to be in error -- a fact the woman claimed she hadn't discovered until after she cashed it and spent the money. Now she has to figure out how to pay it back.

 

Unexpected checks from the IRS are not unusual. Karla K. Dennis, the owner of Cohesive Tax, a tax and accounting firm in Cypress, Calif., says more than 5% of her tax-practice clients received unexpected refunds last year.

 

"It was very disturbing," she says. "Many of the refunds were because IRS processed the returns incorrectly through their electronic filing system. When clients receive refunds unexpectedly, they immediately blame their preparer because they believe the IRS is correct."

Joy at receiving such a windfall is usually short-lived. If they tell their tax professional, they'll be advised not to cash the check yet. "Eighty percent of the time, the checks were issued erroneously, and we must send them back," Dennis says.

 

If someone just cashes a check anyway and heads for Vegas, there can be trouble when the IRS discovers that, say, an estimated payment had been applied to the wrong year or that some other error was made. The taxpayer will have to repay the money with penalties and interest. The IRS shows no mercy just because it sent the money in the first place. Post continues after video.

What to do

Small checks may not be worth tracking down. They're usually from some small calculation adjustment. Take your jackpot to a coffee shop and celebrate.

 

If you receive a large mystery check from the IRS, however, follow these steps:

  • Contact your accountant immediately. Give him or her copies of all correspondence from the IRS, and follow your accountant's instructions. Do not deposit the check or send it back until instructed.
  • If you prepare your own taxes, call or write the IRS and ask for an explanation. Hold the check until you know if it's correct. Don't deposit it, even into an interest-bearing account, thinking you could pay it back later. The interest and penalties from the IRS would outweigh anything you made on your temporary balance.
  • If you decide the check was a mistake before cashing it, write "VOID" in the space you would usually sign the check and mail it back to the IRS with a letter of explanation. Be sure to get a certified return receipt.

In my case, I called the IRS for an explanation. A representative went through my return with me line by line, and we had it narrowed down to something in my inventory calculations. The representative said, "Nobody made any notes to say what they did or how they did it." He left a note in the file that I had called. Then the line went dead.

 

I cashed the check. It looks like flying lessons money to me, but I'll keep it in a safe place just in case. Sometimes that's the best you can do.

 

Sally Herigstad is a certified public accountant and author of "Help! I Can't Pay My Bills," published by St. Martin Griffin Books. She is a personal-finance writer who has contributed to MSN Money since 1998.

 

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30Comments
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You talk about checks mailed in error, what about if you are still waiting to receive a refund? I went through a free service and e-filed mine in Feb and I am still waiting to receive my refund. I have contacted the IRS several times and each time I am told that I have to wait another 30 days to find out about it. I earn between 12,000 and 15,000 a year and was told that they are "reviewing" it, but have not been told why after all it is not like I earn a very large yearly income. I did receive one letter just recently, but there was still no reason given for the delay just that they are "investigating" it. I had received my state refund 2 weeks after filing, when I usually have to wait longer for the state refund. I think that I deserve an explanation for why it is taking so long, but I am not going to call again now, seems every time I call it is delayed another 30 days. I bet though that if I owed them the amount I am getting back, they would have already sent me a notice, and I would be paying interest and late fees, but they should be paying me interest and late payments for making me wait so long. Yea fat chance for that.

Jul 1, 2011 9:43AM
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Even when you do not cash the check ,the IRS is ruthless ,they assume you tried to defraud them and audit you . I got a 66,000. dollar check ,did all of the above and I have been  harassed unmercifully for the last 5 years. Again I did not cash the check ,had my CPA deal with them and have spent 5 years in tax hell . I think the Fair Tax is the only solution to the abuses of our current income tax .
Jul 1, 2011 7:23AM
Jul 1, 2011 10:35AM
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When a business makes a mistake and they can't get it corrected in time ( like a store ) they either retract it and post the retraction on the door or they simply suck it up and take 'the hit', they back it out of their taxes and call it administrative error.  I have had my share of problems with the IRS.  By the time my accountant gets done with them they wind up owing me more money than if they had just left me alone.

The IRS has so many lives in it's hand it is just plain scary.  More than ever before people are jobless, many are homeless and folks are scratching dirt to get by.  Still most pay their taxes.  It is inexcusable for them to make errors at this point in time.  Folks need their refunds and they need it now, not when the government finally gets it figured out.

Our government continues to raise our taxes with no end in sight for our own good.  Individual households MUST live within their means, we have no choice.  The government continues to spend without rhyme or reason.  Congress needs to tighten up their own belts take a 30% cut in pay ( just like the citizenry ) and just deal with it!  The rest of the country  has.

Jul 1, 2011 9:37AM
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Our present income tax system has grown past human comprehension . . . or even human control (though, of course, that is a feature, not a bug, to our congressional masters, as it allows them to reward large contributors--and potential post-congressional career employers--with credits, deductions, accelerated depreciation, etc.)  The average individual, including the average small businessman, should not need to use a professional tax preparer to file his taxes.  Perhaps even more crucially, the present income tax severely handicaps the productive economy by distorting the price system on which the efficient allocation of resources depends.

 

We need to move to the Fair Tax, a national sales tax that is applied to the final price of retail transactions; it is most emphatically not a VAT, which is embedded within the price history of the production and handling process of goods and services, and hence can be hidden from public view.  (My European friends tell me that the same politicians who load on the VAT markups will then shamelessly turn around and lambaste producers for price gouging . . . much like the Kabuki theater that ensues in Congress every time the price of gasoline rises steeply.)

Inform yourselves about the Fair Tax, then call your congressmen and senators to demand the replacement of the present opaque system with this paradisaically simple alternative.

Jul 1, 2011 9:48AM
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We received a check from IRS but we weren't expecting one so obviously something didn't feel right. We called IRS and spoke to an agent explaining what we had and she assured us that it was a good check and then said "go ahead and spend it". I asked her to please be sure and of course she was positive. We sat on the check for awhile and then I called them again asking them to please check into this for me and again was reassured that it was a good check and to feel free to spend it. After about three months we deposited the check and figured that was it..

Great extra money when we needed it... that is until we got the dreaded letter from IRS one month later stating that we had received a check in error and that we had to pay it back. I called them explaining that WE did not make the mistake, that WE called them twice and was assured everything was fine so how is this our problem? Ha Ha...it's always our problem IRS never owns up to their mistakes and if they do they never take responsibility for them. This is so wrong and this type of mistake causes families hardships above what they are all dealing with already.  Why are we always accountable  when it is their mistake? and why do we owe even more than what they send if we can't send it back the next day? I don't know what more we could have done, they were not going to say keep it, sorry our error. They become blood suckers on the prowl and very demanding, even threatening.

Don't trust them when they quickly respond with a cheery go ahead and spend, hang onto the check for as long as possible. Also send the money Back quickly or pay a daily penalty...You have to have no heart to work for IRS, I could not be a part of that kind of evil. Remember if it has to do with IRS, there are no Happy endings, if you didn't expect the check then it was a mistake.

Jul 1, 2011 10:08AM
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You have to be brain dead to cash an IRS check that YOU KNOW  you were not supposed to be receiving.

Stop playing stupid with the comments that you didn't know it wasn't valid !!!

Jul 1, 2011 10:14AM
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When I was 20 the IRS direct-deposited $888,888.88 into my bank account and at the same time the USAF sent me a $20,000 check because they had me listed as "deceased". It took two months to get them to believe they had made such an error. They let me keep the interest earned:) I thought about withdawing it and moving to Israel but I didn't want Interpol chasing me the rest of my life.
Jul 1, 2011 9:07AM
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I received an unexpected check from the IRS for $400 last year after I filed my own taxes by paper.  Believing it was a mistake, I held on to the check and waited a couple of weeks for an explaination.  Ends up I qualified for a credit I didn't know about, and the IRS agent kindly fixed the error for me.  That was a nice surprise!  I suppose I was in that 20%.
Jul 1, 2011 10:50AM
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Just this month, we got a letter from the IRS saying we owed an additional $4,200 + penalties and interest for 2009.  I almost had a heart attack, since I prepared our taxes using tax software that has never failed me in the past.  After going over the return, it appears someone at the IRS entered all of our stocks and bond sales TWICE!  We are in the process of getting this cleared up, but it has been one big pain in the ****, and the burden of proof has been on us.  They are idiots at the IRS!
Jul 1, 2011 10:18AM
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I think it's disturbing that IRS has mismanaged our tax dollars so poorly.  Even though  these type of things keep occuring, they have not established effective internal controls from managing their most important assset!  Shame, shame, shame...
Jul 1, 2011 7:50AM
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The IRS may be messed up sending the checks, but it's like when you cash your pay check at the bank and they give you say $100 more by mistake. That's not your money either. You know how much your refund should be. Just getting an "unexpected" check, is not reason enough to go on a shopping trip. It's stealing, just the same. IRS or not.
Jul 1, 2011 10:37AM
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With me it was the other way around.  In the 80s I got a letter from the IRS telling me that I had a refund of $8,000 due.  This was actually the other way around.  I owed them that money.  I called the IRS and explained so.  I was told not to worry, and that the IRS would correct the error.  NOT! !  The situation continued for months & months on end.  I called at least 4 times in an effort to correct this.  When the IRS finally caught their error they charged me penalities and interest.  Of course, I got no simpathy.  My accountant told me to just pay it and shut up; not stir up the hornet's nest or my account could get "flagged" which would give me years of trouble.  Needless to say, this still makes me angry.
Jul 1, 2011 11:14AM
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This isn't news: IRS had been a menagerie of bungling, vicious criminals since its misbegotten gargoyle birth.  The tyrannical (incapable of anything remotely approaching unifom or rational interpretation, it can only be made operative by a dictatorship) Tax Code is neither enforceable Constitutionally as a statute bearing punitive (criminal) authority or as a matter of contract (which, like any law, must be understandable by the parties).  Neither can a nation such as this one purports - free, with free markets - hope to recover from the economic crisis it now faces on account of it idiotic revenue system until IRS and the tax code are done away with.

 

Wake up, "America!"  You have been stolen and handed over into bondage.

Jul 1, 2011 9:17AM
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someone receives a $40,000 check from IRS, cashed it, spent it, then claims she didn't know it was a mistake.  what a liar.  prison time for a thief (claiming ignarance is no excuse)
Jul 1, 2011 8:49AM
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Everyone should send the IRS a check for $1.00 and see what they would do to figure out how to handle it.  No address or phone numbers on the check, no reference, no letter.  Just the check

Jul 1, 2011 8:15AM
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I agree racerx! They do have to pay you interest so make sure they do. I would call them just to ask a basic question and that is " If I didn't get my refund yet, how much interest will I get in the mean time" ? If they tell you, write it down cause you might need it for court if it would go that far. I called this year for that and they told me they do pay interest til I get it. I told them what I charge in interest for waiting( 20%) just like the credit cards. The reason I told them that was " If you make me wait and it hurts my business, then I charge you interest to pay for it"! I got the check within a week. They don't play, I don't either.
Jul 1, 2011 10:48AM
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First of all the lady in Baltimore Ihave no sympathy for, if you get a 40,000 check from the IRS and you weren't expecting it.  You say you didn't know and cashed and spent the money.  She knew that money wasn't hers. What person gets a 40,000 tax check?  I agree with the others, when you owe a refund they are merciless, the penalties and interest are horrible.  They threaten your property and income.  that's when you only owe like 3,000 what about these big corporations who are getting their taxes decreased by these tax agencies, I owed 250,000 and only paid 4,000 they want all of mine.  Maybe the government needs to start collecting the full amounts from these big companies if they're going to make us little people pay 100%.
Jul 1, 2011 9:24AM
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@Frecks23 Put in prison?! So you are saying you have never made a mistake at your job? Maybe if they accidentally mailed a check for $40,000 to someone they need to be fired or go through retraining or something, but prison? Now if they sent their brother a check for $40,000 and made it look like a legitimate return, then that would maybe be worth prison, but come on, don't be so melodramatic.  
Jul 1, 2011 10:03AM
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Fortunately I have never had to deal with such an incident.  However that being said I fully understand that the IRS is, after all, a huge bureaucracy.  As such it has no heart or soul but simply exists based upon its rules and regulations.  For that reason I have used a professional tax accountant for the past 10 years and rely exclusively on his calculations and advice.

 

There are just too many 'gottchas' and discrete little changes in the tax laws every year for me to take the time to keep up with them.  That is why that I question anything that doesn't agree with my accountant's calculations because trying to resolve issues with a huge bureaucracy is rather like arguing with a big rock.  You lose every time unless you are willing to really bring out the big guns and spend a lot of time, effort, and money to fight them.   LOL 

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