Ten Federal Tax Refund Tips that You May Need to Know

If you are planning to file a tax return with the IRS, then you likely will fall into one of the following scenarios. You may end up owing the government money, or else you will be eagerly awaiting your refund. If you are in the latter category, here are 10 facts regarding refunds that you should be aware of:

1. The IRS will only hold your refund for three years.

By law, the IRS retains an individual's refund for a period of three years, starting from the due date of the return. After the three year statute expires, the refund is forfeited.

Three years is more than ample time for a taxpayer to make a claim on the funds that are owed to them. The IRS is not a banking institution; they are not designed or staffed to manage an individual's money in the capacity of any sort of long-term investment. If you are legally required to file, the IRS still expects that you do so, even if more than three years have passed.

2. If you owe the IRS, you will not get a refund.

Most taxpayers are aware of the fact that if they have a balance owing the IRS, their future refunds will be offset to that balance. However, if you have entered into a voluntary arrangement to make monthly repayments on your past debt, your refunds will still be held until all prior year balances have been paid in full.

3. The IRS may offset your refund to another Federal or State agency.

The IRS has partnered with a number of States for the transferring and application of refunds toward delinquent debt. Out of the 42 states that currently have an income tax, over 30 of them have collateral agreements with the IRS to offset refunds. In other words, your state refund may be applied to federal debt and vice versa.

In addition, the Treasury Offset Program intercepts taxpayer refunds to offset for non-tax debts such as unpaid student loans and child support.

4. Those two day or 24-hour refunds are actually loans.

Companies inundate tax filers with boasts about how quickly a taxpayer can walk out of their offices with their refunds, but there are a number of possible discrepancies in these programs that one ought to be aware of.

The IRS has never deviated from the standard times it takes to process a return with a refund. A refund from a paper return, sent in the mail, can take up to 8 weeks. An electronically filed return may take up to three weeks. Adding the option to have your refund directly deposited shaves about a week off of these timeframes; e-filed returns with direct deposits can even be processed in as little as 10 days.

Anything promised earlier than this is something called a Refund Anticipation Loan (RAL). The tax prep company is loaning you a sum of money; they in turn are reimbursed by directing your refund back to them. However, if your refund is held for examination for any reason, or offset to another debt, then you not only will owe the company the money back, but you also may owe the IRS. Before applying for a RAL, be sure everything claimed on the return is proper, that all income sources have been included, and that you have no outstanding federal or state debts.

5. Be wary of tax preparation fees.

I'm always surprised by the fees charged by preparers for the filing of returns, even extremely simple ones. It's not uncommon for a one page 1040-EZ, which takes no more than five minutes to prepare and file, to carry $50 to $100 prep and filing fees.

Additionally, the RAL products, mentioned above, carry their own fees. Unfortunately, some taxpayers have paid upwards of $100 or more to get a "Rapid Refund." If you simply electronically file with the direct deposit option into your own account, and wait just a few more days or maybe a week, you can easily avoid these fees. Unless you need the cash immediately, then the RAL options are rarely worth the extra money spent.

Make yourself aware of the multiple free filing options on irs.gov and elsewhere. Each year, the IRS teams up with various companies for free filing. For the 2009 filing season for example, you can e-file for free through the IRS web site if your Adjusted Gross Income is $57,000 or less. Click on the FreeFile logo on the IRS home page.

Additionally, local IRS Taxpayer Assistance Centers offer free return preparation. AARP and Volunteer Income Tax Assistance sites are available as well, as is free assistance for military families. For information on these programs, see the link Free Tax Return Preparation For You by Volunteers on IRS.gov.

6. Your claim for refund may be examined.

Be aware of what you are making a claim for on your tax return. Various credits, deductions taken on a Schedule A, dependents claimed and the Head of Household filing status are all potential areas for additional scrutiny. Remember, no matter who prepares your return, you are ultimately responsible for what goes on each line.

One credit that oftentimes gets denied is the Earned Income Tax Credit (EITC). This credit is available for lower income families or individuals, and if you have qualifying children, the amount you are eligible for increases. However, there are a number of requirements that must be met before you can lawfully take this credit. Familiarize yourself with them!

If the IRS determines that you were not eligible for the credit, then you likely will owe money back. It may be a number of years until this mistake is found; penalty and interest charges will be added. Moreover, if you want to take EITC for a subsequent year after you have been denied the credit on a previous year, you must file Form 8862 to let the IRS know what has now changed which once again allows you to take the credit. If you fraudulently claim the credit, you may be banned from claiming EITC for a period of 2 or more years.

7. Wait before you call the IRS to check on your refund.

Before you barrage the IRS 800 number and demand to know where your refund is, first of all, understand the general timeframes for processing a return, mentioned above.

Use the online tool Where's My Refund to check the status. You will need to know your Social Security Number, your Filing Status, and the exact whole dollar amount of your refund.

If you have not been able to get information using the online tool, and the timeframe for processing your return has passed, call the IRS at 1-800-829-1040.

8. Prevent your refund from being applied against your spouse's debt.

If you file a joint return, then the IRS treats any refund as belonging 100% to both spouses. In other words, if one spouse has a delinquent federal or state debt, the entire refund will likely be applied to it.

In order to prevent this, you may choose to file separately from your spouse. However, joint filing generally yields a higher potential refund. In order to prevent your portion of the refund from offsetting against your spouse's debt, file the return with Form 8379, Injured Spouse Allocation. This form separates your refund from your spouses. It does not split the refund in half. In other words, you must have a refund on your own, from your withholdings, your credits you may be eligible for, etc. The 8379 assures that you get your money, and that your spouse's refund only is applied against delinquent debts.

9. Make sure your refund is guaranteed.

If you choose to make use of a third party preparer, make sure there is some sort of benefit involved in the service, or language in the contract, that covers you in the case of an error made by the preparer. Although the IRS cannot hold a preparer responsible for errors, most reputable tax prep companies have their own internal system of checks and balances which cover you for reimbursement of penalties, interest, and for free representation if the error was not yours.

Ask about the timeframes you are covered for. The IRS generally has three years to check on everything claimed on a return and all income sources. A few month's coverage for preparer mistakes is useless.

10. Know what you're talking about.

These are more of my personal peeves, but understand the difference between a "return" and a "refund." You file a return; the IRS gives you a refund. Don't call the IRS 10 minutes after the postman gets your 1040 out of your mailbox. And please, exercise courtesy if you call the IRS. If you owe back taxes, delinquent student loans, the state, or if you have not paid your court ordered support for your child and or ex-spouse, then own up and take responsibility for the fact that your refund has been applied elsewhere.