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Form 1040X: What to do when direct deposit tax refund amount is incorrect

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Taxpayers breathe a sigh of relief when their taxes are done. Receipts can be put away. Mortgage forms, child support payments, student loan statements and 401(k) work can finally be put in a file drawer. But then the inevitable happens. A tax form shows up in the mail that wasn't accounted for, and the taxpayer realizes she'll have to file a 1040X to clear up the whole situation.

Even worse, the refund amount (or tax payment owed) is now incorrect, but the taxpayer has already mailed the information off and included a correct direct deposit checking account number. The IRS sees the original 1040 form sent and thinks everything looks good. The Social Security number is correct. The direct depoisit routing number and checking account number are correct. But now a second form has to be sent off to fix the first 1040 tax form.

And then the direct deposit refund shows up in the taxpayer's checking account.

So what should be done now?

First, don't panic. If a mistake is made once, unfortunately there is a possibility that a mistake could be made again. Don't write out a check via snail mail and mail it to the IRS before they can respond, mainly because if it turns out the 1040X amount is wrong again, now the taxpayer will have to figure out how to correct a third amount (either a refund or more taxes owed).

Second, do not spend the incorrect tax refund deposit. If it turns out that the 1040X amount is correct, it is much easier to just mail back the difference as opposed to spending it and trying to pony up that same amount later. Even worse, if the 1040X is incorrect and the taxpayer owes money, now not only will the taxpayer have to dig up the original money but scrounge up even more.

Third, wait to hear back from the IRS with a response to the corrected form. Taxpayers will notice that there is no direct deposit section on the 1040X form. The IRS instructions for 1040X state, "refund on an amended return cannot be deposited directly to your bank account." The primary reason for this is probably because it'll just lead to more confusion for overpayments and a second overpayment if more money is still due.

(5/13/2014 Update: Keep in mind that the IRS will add late interest if a payment is not included with the 1040X form after April 15 even if the postmarked date is before then (Internal Revenue Code 6601). IRS reps confirmed with the Chicago Personal Finance Examiner that the check is cashed immediately before verifying whether the 1040X form is correct. So if the 1040X form turns out to be incorrect and the tax payer actually is due more money, then there may be another two- to three-week waiting period to get the original check amount back via snail mail. Although sending an initial payment eliminates the interest rates for late payments, it also extends the length of time to get the money back if a second mistake was made on the 1040X form. It's up to the tax payer to decide which way to go.)

Fourth, call the IRS to see what you should do. If the taxpayer is really uncomfortable with waiting for the letter, especially if it's getting too close to the April 15 deadline, contact the local Illinois office and explain the situation to a representative. Or, contact the main line at 800-829-1040 and follow the prompt to talk to a representative. This option may turn into a disappointment around April because the lines are incredibly busy, and tax payers will more often than not be sent to automated systems that will only check on the status of their 1040X forms.

Fifth, look out for the 1040X form results. When the form arrives, it'll have a Billing Summary, including the increase in tax, increase in credit for tax withheld and the increase in interest, as well as the amount due date. Send potential payment to the address at the bottom of the first sheet.

Sixth, do not forget about state taxes. If the corrected 1040X form is accepted by the IRS, chances are even higher that the state tax form is now incorrect. Make sure to submit a corrected 1040X IL state tax form. However, the instructions for this form state:

If you file Form IL-1040-X because you filed a U.S. Form 1040X or Form 1045 that resulted in an:

  • overpayment, you must wait to file this form until you receive a federal finalization notice from the IRS stating that they have accepted your change either by paying a refund or by final assessment, agreement, or judgment. Write the date the IRS notified you (not the date you filed your U.S. Form 1040X) in the appropriate space in Step 1, Line F, and attach proof of federal finalization.

Proof of federal finalization for U.S. 1040X deductions includes a copy of the notification you received from the IRS that they accepted your changes (e.g., a refund check, "Statement of Account," agreement, or judgment) and:

  • a copy of your U.S. Form 1040X, if filed, or
  • a copy of your U.S. Form 1045, Application for Tentative Refund, including all pages of Schedules A and B, along with a copy of your refund check, if you filed your federal amended return due to an NOL.
  • a balance due, you must attach proof of federal finalization and write the date you filed your U.S. Form 1040X and paid the tax due in the appropriate space in Step 1, Line F. Failure to provide this date could result in an assessment of a late-payment penalty.

Proof of federal finalization for U.S. 1040X underpayments is a copy of your U.S. Form 1040X and a copy of the check you sent to the IRS to pay the tax due.

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