Big, unexpected IRS check? Don't cash it

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."

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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.

More on MSN Money:

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• Americans getting bigger tax refunds
• 10 things not to do with your tax refund
• Do I have too much debt?
• Why I hate income tax refunds