Tax refund recommendations
Robison redux

IRS error in your favor

Bankerror_2 In all my years of filing taxes, I've gotten two follow-up letters from the IRS.

The first was back in September 1996, and it began: "We're proposing changes to your 1994 tax return."

Yep, almost 2½ years later and IRS examiners are hard at work. It took them that long to notice that "the information on your tax return isn't the same as the information reported to us by your employers, banks, and other payers."

In this case it was those "other payers" that tripped me up. Although I'd been reporting dividend and capital gains distributions for years on our investments, I simply screwed up that year and forgot to transfer a particular amount from Schedule B to our 1040. That meant I underreported income and stiffed Uncle Sam out of a little more than $1,000.

Because I messed up and it took the IRS 29 months to catch it, the agency also tacked on interest of $147 for the unpaid amount.

We had gotten a refund back in 1994, and even if I had properly included the investment income, we still would have gotten a refund that year. Of course, by the time the correction letter, and bill, arrived, that refund was long gone. So I had to raid our emergency fund.

Am_crow_2 Even worse, my mother was visiting when the IRS notice arrived. So she got to see me get indignant and huffy and announce that "the IRS is wrong! I've been doing this the same way for years!" Then she got to see me eat crow (more salt, please) and admit that it was indeed I who screwed up.

There was a tiny bit of good news. The IRS had figured our underpayment and interest amount for the full month of September. But I got them their money early, so a few weeks later they sent me a refund check for the $2.23 in interest I was due back since I paid so promptly.

Fast forward to 2004 and the second communiqué from the IRS.

The tax collector once again is telling me I made a filing mistake, but this time not only did I screw up our 1040, I screwed us out of a major refund.

The tax-arrogant part of me wanted to announce, as I did in 1996, that the IRS was wrong. But the greedy part of me was, at least internally, doing my best courtside (not hotel) Marv Albert: "Yes!"

The IRS is batting 1000 when it comes to reviewing and correcting our returns.

When I got the letter in June 2004 noting an error on the previous year's return, I remembered actually asking back then how we could owe. Relatively speaking, it wasn't that much, but tax cuts in various areas had been phasing in, thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, which produced (at that time) the most comprehensive tax law changes in 20 years. How, in view of these breaks, could we be paying?

But I reviewed the forms what seemed like a million times before making the hubby sign and then sending them, and our check, off in April 2004. Two months later, a big IRS check arrived.

I'm talking really big. $4,232.35 big.

It freaked me out. I double checked the names on the check, wondering if the hubby had a second life I didn’t know about but one I was very glad the proceeds of which were coming to our house!

I double checked the Social Security numbers. I even double checked that it was really, truly an official U.S. Treasury check.

I looked at the check for four days and then the IRS letter arrived. I was certain it was going to say "Oops! Please send that check back because we really didn't mean to deliver it to you."

Instead it said the agency had "found an error in the amount of tax entered from the tax table or tax rate schedules."

D'oh! I had used the tax table for single filers instead of the one for married couples filing jointly (I guess those marriage penalty changes did help after all!). I felt like a fool, especially since that's a mistake (#14) I warn others about in this story. But I felt like a four grand richer fool!

And this time, the unexpected refund went into our individual retirement accounts.

Today's Tax Tips: You can read in this story about some more reasons a refund might not be exactly what you expected.

And here are a few more lessons learned from IRS examinations of our tax returns.

Lesson #1: As evidenced by the 1994/1996 filing/correction, the IRS does take full advantage of the time it's legally allowed to look over your returns. Hang onto your tax records for at least the three years that the agency recommends. In fact, it doesn't hurt to hang onto to the actual 1040s and attached schedules and other forms forever.

You can toss the back-up material after three years if you want, but the forms themselves also could come in handy for other things, such as a loan where the bank wants five or 10 years of proof of filing.

Lesson #2: Taxes for a married couple is definitely a for better and for worse deal. Although my husband might try to argue he's the innocent spouse when it comes to tax mistakes on our return since I do the bulk of the figuring and filing, when he signs the forms I complete, in the eyes of the IRS he's just as responsible for any underpayment (and interest) we owe as he is for those happily unexpected refunds.

That's why, even if just one spouse takes care of most of the tax duties, it's important that wife and husband discuss their tax (and indeed their overall financial) situation.

Finally, lesson #3: Don't panic when you hear from the IRS. Yes, it could be bad news like we got back in the '90s, but it just might be good news like we got in 2004.

Addendum: This post was selected April 23 for inclusion in the 45th Carnival of Personal Finance.

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Heh. I posted an article with the EXACT same title the day after you did. And we BOTH submitted them to the Carnival of Personal Finance.

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