How do I deal with an erroneously large refund?

Question

Alright, it's a weird complaint, I know. But I just checked on the status of my refund on the IRS Refund Status website, and the IRS had corrected upward the refund I filed for by a lot. Based on the correction note (relating to the "calculation of net profit or loss" on Schedule C) and the amount, it looks like they took all of the income from my freelancing and straight up zeroed it out for some reason, so I'm paying $0 tax on everything but my main job. A majority of this income was on 1099s but not all of it.

I'm a little worried about receiving the direct deposit in a week and then having to both return the money and pay a fee. I've been trying to call the IRS but their lines are jammed, naturally.

What should I do at this point? I figure this will get sorted out eventually, but how worried do I have to be about getting it solved immediately? Or if I wait until their lines are clear (by which point I've probably received the money, and it's set up for direct deposit so it won't be a check I can just not deposit) is that likely to be okay?

Edit: I have managed to talk to the IRS and it turns out they amended my return to double-count all of my 1040ES payments. Odd! In any case, they said that it would be fine to wait until I receive the refund, and then send them a check for the excess, along with an explanatory letter. I can then file a 1040X later to correct the record.

Answer 1

According to the IRS, in "Tax Topic 152: Refund Information",

Not Entitled to Refund Received

If you receive a refund to which you're not entitled, or for an amount that's more than you expected, don't cash the check until you receive a notice that explains the difference; then follow the instructions on the notice. For a direct deposit that was greater than expected, review the notice to determine if the difference was correct, and follow the instructions on the notice. For information about returning an erroneous refund, see Topic No. 161.

So, at some point, you should receive a notice in the mail describing the changes they've made. That notice should include some sort of instructions for what you should do if you disagree with their changes. You may want to see the IRS's information on "Understanding Your IRS Notice or Letter". As that page says, that notice will include a contact phone number you can use if you want to discuss what's going on with them.

That notice may include deadlines for taking action. There's no real need to do anything "immediately" before you get the notice, as generally the IRS handles issues via mail. (And they never make an initial contact with you by phone or email, though scammers will try!)

Obviously don't spend the money until you're sure that you're supposed to get it, since you may need to send it back once everything's straightened out.

Answer 2

Compiling several answers and comments above, plus what I have learned from the IRS:

1. The quickest resolution to the problem was by calling the IRS at 800-829-0582, extension 732. They were able to figure out where the problem was and direct me to the proper solution.

2. Since my refund was coming direct deposit very soon after I noticed the problem they instructed me to wait until the direct deposit was made (this answer may not apply if a check is being sent, or if the direct deposit is far in the future), and then...

3. Immediately send a check back for the excess amount:

   1. To the same address I sent my 1040 to
   2. With an explanatory letter explaining the issue and including my name, DOB, SSN, and address
   3. With my name and SSN also on the check

4. I was told that, if I sent a check back with the excess and an explanation quickly, that no fees or interest would be charged.

5. I was also instructed to fill out a 1040X that would reflect the proper refund amount. However, because the IRS has made amendments to my 1040, I have been told to wait until I receive a copy of the amended 1040 before preparing the 1040X, even though this will take several weeks. I had to ask on the phone for a copy of the amended return to be mailed or faxed to me; this was not automatic.

Answer 3

Depending where you live, sometimes it is convenient to go into a local IRS field office. In the past, I arrived a couple hours before they opened, and was the first person in line. Once they opened, a member of the staff made a few clicks on the computer and fixed the problem.