You decide to receive that big tax refund by direct deposit, and click your tax return to the IRS. After a few weeks you start to worry about your DIY tax skills and go to Where’s My Refund? A few clicks later you discover that your refund has gone someplace else. Instantly, what you have always considered as your savings account is empty, and the money for vacation and replacing kitchen appliances is gone.
Why do taxpayers want a big tax refund?
A big tax refund is an exciting surprise and a feel-good experience much like winning a prize. For some people, who aren’t disciplined enough to save on a regular basis, it’s a safety net. For other tax filers, even though nearly 80% receive a tax refund, it’s the year-long fear they’ll still owe money at tax time. One of the easiest ways for many people to assure a big tax refund and calm their fear is to change the deductions on their W-4 Employee’s Withholding form.
Most people who receive refunds use the money to pay bills and make big-ticket purchases or take vacations. Surprisingly, only about a third use this money to build up savings. CNN reported in January that only 41% of adults had savings to handle an unexpected $500 or $1000 unplanned expense.
Millennials are not only better prepared to handle unplanned bills, but their numbers rose from 33% in 2014 to 37% in January 2017.
Is a big tax refund good tax strategy?
When the big tax refund check arrives or the direct deposit hits your checking account there might be high-fives all around and a “let’s go out to dinner” celebration. But, is giving the IRS your money really the best way to protect yourself?
3 rarely-mentioned reasons a big tax refund is bad tax strategy!
- Your money becomes their money. You work hard to make money. Don’t give it to the government as an interest-free loan.
Which IRS agent signed the contract that the government would refund or repay the money they borrowed?
When a dispute arises between a taxpayer and the IRS, the burden is on the taxpayer to prove the IRS is in error. The IRS is presumed right. Don’t like that decision? Let the clock start ticking on possible penalties and interest, and lawyer up.
Never give the IRS access to any more of your money than the law requires.
The IRS does, however, offer the taxpayer assistance through their in-house Office of Appeals, after IRS compliance has made a decision in their own favor. The Office works to be fair and impartial to both the Government and the taxpayer.
- Your money may be funding views you don’t support. Most people agree with one political viewpoint over another, and don’t want to financially support certain causes or projects. When an employee changes W-4 payroll deductions, and provides the government with extra interest-free money, the money doesn’t just sit around. Think carefully before letting more of your hard-earned money work for causes you might not support.
Once the IRS gets their hands on money, it’s pretty much theirs.
- Tax scammers, hackers and refund thieves don’t usually hack a return which has no refund. Nearly every CPA and tax professional has submitted a client’s tax return only to have it rejected as having already been filed. This happens more often on returns with large refunds or returns filed near deadline, whether or not the refund is unusually large. Tax refund thieves are very good at identifying potentially lucrative returns to file early. Don’t set yourself up as a good target.
Why involve your CPA?
- Bankruptcy doesn’t necessarily protect your IRS refund check. When does the bankruptcy code leave you vulnerable to the IRS?
- Marriage can make your spouse’s past IRS problem your problem. Who is really the injured party?
- The IRS can hold your refund until you provide a plan for resolution on some issue you may not even know exists. How can you release the refund the IRS is holding?
Want to learn more about situations like these that wave red flags to the IRS and could cause possible seizure of your tax refund? If you’ve had financial troubles or are actively working out payment issues for unpaid bills, we need to talk.
When we establish a personal relationship with our clients, we take care of a lot more than simply filling in spaces on a tax form. We know your LIFE is your business and we take it as seriously as you.
Schedule your mid-year tax review now. It’s personal.
Contact Melanie Radcliff CPA, Inc.
Call 479-478-6831 or send us an email