Oh no! We may not fully support the browser or device software you are using !
To experience our site in the best way possible, please update your browser or device software, or move over to another browser.
Most taxpayer each year eagerly await their tax refund. 74% of 169.6 million individual tax filers received a refund in 2020, and the average refund was roughly $2,549.
Many taxpayers have a good sense when their refund will arrive. The IRS advertises that, it issues most refunds within 21 days after filing; However, some returns take longer to process than others. For example, early season filers with refundable credits (earned income tax credit, additional child tax credit, etc.) must wait until the end of February or early March to get their refunds.
However, millions of taxpayers each year don’t get their refund on time or at all. IRS procedures allow the government to hold a taxpayer’s refund or take some/all of their refund for various reasons. Here are the most common reasons a refund is held or taken by the IRS:
Reasons the IRS can hold a refund
IRS refund holds can be temporary if the taxpayer can satisfactorily act to address the IRS’s concerns over the accuracy of the tax return or other IRS issue. Five common refund hold scenarios are:
- Suspected identity theft – the IRS flags your return as having potential stolen identity refund fraud. In these cases, the taxpayer will need to verify their identity to release the refund. Taxpayers may receive a Letter 4883C (or a similar letter) from the IRS asking to verify their identity. Once the taxpayer can verify (IRS has several options), the refund is released. This process can take several weeks.
- Wage/income verification – the IRS matches income reported on a tax return with Forms W-2 and 1099-MISC/NEC for tax returns with refundable credits, like the earned income tax credit (EITC) or the additional child tax credit (ACTC). The IRS verifies the income in order to properly allow these credits. If the IRS does not get the W-2/1099 that verifies the income reported, it can delay or even hold the refund until the situation is corrected.
- Earned income tax credit and other refundable credit errors – in these cases, the IRS suspects that the taxpayer made an error on their tax return that resulted in an erroneous claim. A refundable credit, like the earned income tax credit (EITC) or the additional child tax credit (ACTC), allows taxpayers to obtain a credit for more than their tax liability. The result is that the taxpayer receives a refund of the credit. Common reasons for EITC holds are erroneous filing status or dependents and income reporting errors. To resolve this issue, the taxpayer must respond to the IRS mail audit and establish that they qualify for the credit.
- Questionable return item – like the potential erroneous EITC or ACTC, the IRS has flagged the return for a questionable item on the return. In these cases, the IRS will review the return (i.e., audit the return) to determine if the taxpayer is entitled to the refund.
- Prior unfiled tax returns – taxpayers receive a CP 63, We Have Held Your Tax Refund – Act Now, or CP 88, Taxpayer Delinquency Investigation (TDI) Refund Hold. In these cases, the IRS can hold a refund for 6 months (or more in certain cases) until you file a required back tax return. If the taxpayer does not file a return, the IRS can file a return for the taxpayer (called a “substitute for return”) and use the current year refund as payment.
Refund holds can be released if the taxpayer can resolve the cause of the hold. If the taxpayer cannot resolve the issue, the IRS will disallow their refund. In situations where the taxpayer has made serious errors in claiming EITC, AOTC, or the American opportunity tax credit, the IRS can place a two-year ban on future claims. Taxpayers who are deemed to have committed fraud can face up to a ten-year ban on future credit claims.
Reasons the IRS can take a refund
When a taxpayer has made an obvious error on the return or has other debt issues (tax and certain non-tax debt), the IRS can take their refund, in whole or in part, to correct the error or pay the outstanding debt. Here are the three most common situations when the IRS takes a taxpayer’s refund:
- Error on the return or incorrect reporting of withholding/estimated tax payments – in these situations, the IRS will adjust the return and send the taxpayer the corrected refund (or balance due). A common error that occurs is when taxpayers incorrectly list too much or too little estimated tax payments that were made during the year. In these cases, the IRS will issue a notice (CP23 or CP24) and automatically adjust the refund to account for the correct amount of estimated tax payments made. Taxpayers who make errors or have discrepancies on paper filed returns also can have their refunds adjusted by the IRS.
- Prior year tax owed – if the taxpayer owes for a prior year, the IRS will always take their refund to pay the balance owed. In these cases, the taxpayer will receive IRS notice CP 49 that will explain how the refund was used to pay back taxes owed.
- Certain non-tax debts – if the taxpayer owes other debts that are subject to refund offset (i.e., back child support, delinquent student loan payments, repayment of unemployment benefits, etc.), the IRS can take their refund to pay these amounts. Generally, this is not an IRS issue and the taxpayer will need to contact the Treasury Offset Program to resolve the issue.
Resolving a refund issue
Resolving refund issues starts with identifying the cause of the problem. IRS notices can give you some indication but often do not get to the root of the problem. In many cases, the IRS may have to contact the IRS for the underlying reason.
If the taxpayer has an underlying issue that is causing the refund hold or offset such as an unfiled return, past balance, or other dispute; they will need to resolve that issue before the IRS will release the refund.
During tax season, it is difficult for taxpayer to get through to the IRS. Taxpayers should call early and be prepared with their tax file to resolve the issue by phone. Many taxpayers may want to engage a tax professional who is versed in dealing with the IRS. Tax pros can quickly get a tax history and explanation from a specialized IRS function called the “Practitioner Priority Service” (PPS). PPS representatives are especially helpful in identifying tax issues and can even resolve some simple issues on the same call.
One “solution” that rarely works is doing nothing. In most cases, the situation will not resolve itself. You will need to act and resolve the issue before the refund can be issued.
Do you have additional questions?
For assistance creating a strategy to address your tax issue, visit Jackson Hewitt’s Tax Resolution Hub to see the various ways we can help you.
About the Author
Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.