I know, good problems to have, right?
Receiving a larger-than-expected tax refund might feel like a stroke of luck, but for a business owner in Seattle, it can often be a sign of a looming audit or a clerical error that needs immediate attention. Whether it’s a simple math error on your 1040 or a more complex issue involving estimated tax payments.
“Keeping the change” isn’t a viable long-term strategy.
The IRS operates on a “pay-as-you-go” philosophy, and while they are quick to collect, they are equally precise about what they issue. If you’ve received an erroneous refund, here is how to handle the situation professionally and protect your business from unnecessary penalties.
Key Steps for Handling an Erroneous Refund
- Don’t Deposit or Spend the Money: If the refund arrives via a paper check, do not deposit it until you have verified its accuracy with your tax advisor. If it was direct deposited, leave the funds untouched in your account.
- Verify with Your Records: Compare the refund amount to your original tax return and any notices received from the IRS, such as a CP24E notice, which explains adjustments the IRS made to your return.
- Return the Funds Promptly:
- Paper Checks: Write “VOID” in the endorsement section on the back and mail it back to the appropriate IRS location within 21 days.
- Direct Deposits: Contact the Automated Clearing House (ACH) department of your bank and request they return the refund to the IRS.
- File an Amended Return: If the error originated from your filing (e.g., missed income or an incorrect deduction), you must file Form 1040-X to correct the record and avoid future accuracy-related penalties.
- Notify the IRS: After returning the funds, call the IRS at 800-829-1040 (for individuals) or 800-829-4933 (for businesses) to explain why the money is being returned and ensure it is properly credited to your account.
Why the IRS Might Send “Too Much”
In some cases, the IRS may have found a legitimate mistake in your favor, such as an overlooked tax credit like the Work Opportunity Tax Credit (WOTC) or an under-calculated Research & Development (R&D) credit. For our tech startup clients in Redmond or SaaS firms in South Lake Union, these adjustments can be substantial.
However, if the refund is truly a mistake—like a misapplied payment belonging to another taxpayer—the IRS will eventually discover the error. Failure to return the money can lead to interest charges and even a 20% penalty on the “excessive amount” claimed.
The Seattle SMB Advantage: Proactive Planning
In Washington’s unique tax landscape—where we navigate the Business & Occupation (B&O) tax without a state income tax—precision is everything. For our dental and medical practice clients, we often see that proactive, year-round check-ins prevent these “refund surprises” from ever occurring.
Whether you are transitioning from a Sole Proprietorship to an S-Corp to optimize your self-employment tax or managing a complex portfolio of income streams, having an authoritative local team behind you provides the peace of mind that your accounting is audit-proof.
Need a Second Opinion on Your Refund?
If you’ve received a notice from the IRS or a refund that doesn’t seem right, don’t wait for the inquiry to find you. Our team understands the local Seattle market and the nuances of complex business ownership.