Susan Tompor: Taxpayers expecting refunds receive confusing IRS letter requesting money

Imagine going to the mailbox and spotting a letter from the Internal Revenue Service that says you owe around $1,000 or more by the end of the month when you know darn well that you’re due a tax refund.

It’s a special kind of tax season torture.

Erroneous notices and confusing letters from the IRS are proving to be as unsettling as waiting for months on end for a tax refund for many taxpayers.

I’m hearing about taxpayers who filed in February and early March after losing their jobs during the economic fallout from the pandemic in 2020.

Early in the tax season, they would have owed taxes because all of their jobless benefits would count as taxable income at that time.

The taxpayers filed before a key change in the tax rules but waited to pay – as was allowed until this season’s May 17 deadline.

And along came the American Rescue Plan, which was signed into law on March 11. The rules changed in their favor. Suddenly, they no longer owed money but they were now going to get a tax refund. And no, they didn’t send in a check by May 17.

No matter, the IRS sent them automated notices anyway in early July to collect the number that appeared on the original tax return. It again illustrates how taxpayers can expect all sorts of odd twists and turns along the way as the 2020 tax season drags into summer.

What’s stranger still: One taxpayer in Ohio reported getting the collection notice one week in July and then, shocker, actually receiving the unemployment-related refund that he was owed the very next week.

Talk about making your head – and likely your stomach – spin.

Nearly 4 million taxpayers were set to get unemployment-related refunds in mid-July, according to the latest news from the IRS. These are taxpayers who overpaid their taxes on unemployment compensation received last year, again before the tax rules changed.

Direct deposits were to begin Wednesday and refunds by paper check by Friday. Other refund money was issued earlier.

Everyone who qualifies still hasn’t received their money, though. These refunds will continue to be issued throughout the summer, according to the IRS.

Why you should read any CP14 Notice

The initial collections correspondence for unpaid taxes is called a “CP14 Notice.”

Jan Lewis, a member of the American Institute of CPAs Tax Executive Committee, said whenever you file a federal income tax return that has a balance due – and you don’t pay it in time – you’re going to have the IRS send you an automated reminder.

What’s unusual now is that some taxpayers didn’t send in the money owed by May 17 because they knew that the tax law changed in March and they’d now be due a refund.

While they could do that, and it makes sense not to send what’s essentially a loan to the IRS, it appears it did trigger this CP14 Notice down the line for some.

Others, of course, sent in their payments in February or March when they filed earlier in the tax season and they’ve been waiting months and months to get their money back.

“I don’t want to ever tell a taxpayer to ignore a notice from the IRS,” Lewis said.

Yet, she said, some taxpayers in this situation should not panic after receiving this first notice, as the IRS is working through returns that were filed before the tax law changed involving unemployment compensation. A second notice down the road, though, could be more troubling.

If you didn’t get your refund already, Lewis does not recommend sending in another paper return or amended return by paper to try to respond to any such notices.

She said she has no doubt that the situation will be resolved ultimately. She said additional notices would be sent before the matter is turned over to IRS collections.

Taxpayers should, according to IRS information online, read a CP14 notice carefully, pay the amount owed by the due date on the notice, make a payment plan if you can’t pay the full amount you owe.

Or you need to contact the IRS if you disagree.

Plenty of people, as you might imagine, disagree.

Sue Martin of Waterford, Michigan, said she had two clients who wanted to know what was going on when they received the CP14 Notice a week ago.

Both were waiting for their tax refunds from the federal government – and they no longer owed taxes after pandemic-related relief tax changes took effect in March.

Martin speculated the letters were automatically sent without taking into account that the IRS is still processing millions of 2020 returns and making adjustments relating to the tax changes.

The IRS did not respond to questions about why the CP14 letters were sent out to those owed a refund or what people in this situation should do next if they receive a letter.

The IRS said Thursday morning that it checked into the complaints and it didn’t find anything widespread.

“We investigated the issue carefully and it is not systemic,” said Luis Garcia, an IRS spokesperson in Detroit.

The American Rescue Plan Act of 2021 excluded up to $10,200 in 2020 unemployment compensation from taxable income.

The exclusion applied to individuals and married couples whose modified adjusted gross income was less than $150,000.

The confusing part is the IRS told taxpayers not to amend their tax returns in most cases when it came to the unemployment compensation issue.

An amended return would be needed, though, if the taxpayer suddenly would qualify for the Earned Income Tax Credit or other key credits, based on a lower overall taxable income.

Some returns did not need to be amended

The IRS also did not want amended returns to address the changes relating to any repayment of the advance premium tax credit involving health care coverage, which was suspended under the American Rescue Plan.

The IRS said it would will reimburse taxpayers who filed early for the excess advance premium tax credit paid on their 2020 tax returns.

The break applies to those who bought coverage in the health insurance marketplace.

Now, though, many taxpayers feel like they’re getting mixed messages.

Martin, who volunteers to prepare taxes as part of programs that offer free tax help to those who qualify, said one of her clients was later told to file an amended return electronically after she called about the CP14 Notice to try to address the problem.

Another client tried to address the problem by calling the IRS but could not get through on Monday and planned to try again.

“I don’t blame the IRS staff for this,” Martin said. “I know they’re overwhelmed and underfunded.”

Unsettling issues continue

Edward Karl, vice president of taxation for the American Institute of CPAs, wrote in a blog recently that many tax professionals have run into problems about unnecessary notices.

Some, he wrote, said they “felt like the IRS is not on the right path to becoming a modern-functioning, evolutionary and respected federal agency.”

In some cases, CPAs said they’ve had experiences where the IRS failed to read correspondence sent to the agency and failed to reply. Instead, the IRS kept sending “increasingly severe notices to taxpayers.”

James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, Michigan, said dealing with the IRS many days can be a “complete mess.”

Many times, he said, correspondence is not being opened or it is lost. At times, he said, the correspondence was sent by certified mail and the IRS still cannot locate it.

“We were working – if you can call it that – with an IRS agent on an audit and were told since they are remote it will be difficult to get ahold of them due to (having) a home in a remote location with poor cellular and internet connectivity,” O’Rilley said. … “We have seen collection letters for matters that do not merit collection notice.”

He said in some cases the IRS was to amend the return automatically, but the notice ended up requiring that the taxpayer “prove” that no payment is due.

“Unfortunately,” O’Rilley said, “calling the IRS results in little to no help.”

What happens if you receive a letter? Don’t ignore it. You may have to try to call the IRS a few times, as phone lines are notoriously busy. Get the name and badge number of the IRS agent that you talk with and write down the time and date of the call.

O’Rilley said those who receive the letters – and are due a refund – should send the IRS a letter that indicates the taxpayer is awaiting a “reprocess” of their tax return to exclude unemployment benefits that will result in a refund

.

Then again, maybe check your bank account or mailbox and see if you just got that refund.that you were expecting all along.Susan Tompor is the personal finance columnist for the Detroit Free Press. She can be reached at stompor@freepress.com.