Written by Michael Carr, CPA
Did you receive an unexpected tax refund? There are two possible reasons why you may be receiving these refunds.
1. Schedule D Tax Calculation Error
The bigger refunds are typically related to an error that the IRS made in the instructions to the 2018 tax calculation worksheet. This impacts a very small portion of taxpayers who filed before May 16th and met five specific criteria. The IRS has acknowledged their error, and they are recalculating the taxes due for 2018 on their end, and then refunding the difference to the taxpayer. For impacted taxpayers, they will receive a refund with no explanation attached, and then about one to two weeks later will receive a CP-21 indicating they should be receiving a refund.
2. Underpayment of Estimates Penalty Abatement
The smaller refunds are typically related to the expansion of the IRS penalty relief for 2018. This refund impacts a very small portion of taxpayers who filed before March 22nd and qualified for the expanded underpayment of estimates penalty waiver (paid at least 80% of their estimated taxes by January 15, 2019). The IRS is automatically abating this penalty and refunding the overpayment to impacted taxpayers. There is no explanation attached to the refund.
What to Do
We recommend not cashing the refund check immediately and instead reaching out to your accountant for advisement. Unexpected refunds are typically not correct and are usually errors of the taxing authority (i.e., IRS, PA). If you cash a check and the tax refund was made in error, you are at risk of incurring penalties and interest until you repay the refund back to the taxing authority.
There are a couple of ways your accountant can check the validity of the refund to let you know whether or not you should cash the check, or if you should bring it to your accountant so they can properly return it to the taxing authority.
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