Following these tips when you receive a payment from the Federal or State government can save you more head-aches than you can imagine.
Tip: Double check the dollar amount of your refund check before you cash it. Make sure it matches the amount on your tax return.
Tip: If you have a direct deposit of your refund, only deposit it into one account. This makes matching the dollar amount easier to do.
Tip: Never cash a check received from the IRS or State tax departments that you cannot tie back to a specific reason or tax filing.
The reason for caution
- Wrong amounts usually mean errors. The error could be yours, or the error could be from the IRS. For example, if the IRS mis-applies a quarterly payment or modifies your tax return, they often will send back an amount that does not tie to your filed tax return.
- No explanation. Often checks received from the government have little to no description to help you figure out what the check is for and why is has changed from the amount you expected.*
- Owed money can create penalties and interest. Once cashed, the door is open for a future IRS bill with interest and penalties. For example, a small businessman sent in his quarterly payroll filing. The IRS misapplied the funds, determined the account they applied the money to had no tax, and then sent a check back to the taxpayer. The taxpayer cashed the check. Two years later the business received an underpayment notice along with substantial interest and penalties. The service even applied liens on the taxpayer’s bank account.
- It may mean identity theft or missing forms. A check with an unusual dollar amount could mean the IRS does not have the corresponding tax form on record. It could also mean your taxpayer account has been compromised.
Should you receive a payment that does not make sense to you, please review your tax return and call for assistance. An un-cashed check received in error can often be returned to avoid confusion and hassle when the IRS finally corrects the problem.
*Note: Sometimes the memo line will include interest paid to you from the IRS. This interest will need to be reported on next year’s tax return.