IRS Cashed My Check but Says I Owe. What Should I Do?

Receiving a notice from the IRS indicating an outstanding balance can be confusing, especially after you’ve already sent your payment. This raises concerns about potential errors or misunderstandings in handling your tax obligations.

Misapplied Payment

One common reason for receiving an IRS notice despite making a payment is the misapplication of funds. This can occur when the IRS allocates your payment to the wrong account or tax year. For instance, if you intended to pay your 2024 tax liability but the payment was mistakenly applied to a prior year, the IRS system may still show an outstanding balance for the current year. These errors can result from clerical mistakes, incorrect information on the payment voucher, or a mismatch in taxpayer identification numbers.

To resolve this, verify your payment details. Check bank statements or payment confirmations to ensure the amount, date, and tax year align with your intentions. If discrepancies exist, gather documentation such as copies of the check or electronic payment confirmation and any correspondence with the IRS. This evidence will be essential when contacting the IRS to correct the issue.

When reaching out to the IRS, provide details about the payment, including the check number, amount, and date it was cashed. You may need to submit a written request to reallocate the payment correctly. Using Form 3911, “Taxpayer Statement Regarding Refund,” can help formalize this request and streamline the process.

Unresolved Prior Balances

An IRS notice may also result from unresolved prior balances. This happens when taxpayers have unpaid or partially settled liabilities from previous tax years. The IRS typically applies new payments to the oldest outstanding debt first, which may leave a balance due for the current year.

Review your account transcripts through the IRS online portal to identify any prior liabilities. These transcripts provide a detailed view of all payments, assessments, and adjustments over time. By examining these records, you can pinpoint discrepancies and evaluate the validity of the IRS’s claims.

Interest on unpaid taxes compounds daily, significantly increasing the amount owed over time. Additionally, penalties for late payments can reach up to 25% of the unpaid tax. Understanding these financial implications can help taxpayers plan and address their obligations more effectively.

Adjustment to Income or Deductions

A discrepancy in your IRS notice may arise from adjustments to reported income or deductions. The IRS frequently conducts reviews and audits, comparing reported figures to third-party data like W-2s or 1099s. For example, if income from a side gig recorded on a 1099-NEC is omitted, the IRS will adjust taxable income to include it, potentially increasing the tax liability.

Adjustments may also affect deductions, such as charitable contributions or business expenses, if documentation does not support the claimed amounts. Maintaining thorough records and supporting documents for all reported deductions can reduce the risk of adjustments.

The IRS has the authority to assess taxes under Internal Revenue Code Section 6201, but taxpayers can challenge these assessments through the audit reconsideration process if errors are suspected. Consulting a tax professional can be invaluable in complex cases involving multiple income sources or detailed deductions.

Processing Delays

Processing delays are another common cause of confusion regarding IRS notices. With millions of returns to manage annually, the IRS sometimes experiences bottlenecks, leading to temporary discrepancies in account status. These delays are more likely during peak filing seasons or when a return is flagged for review.

The IRS relies on a mix of automated and manual processes, and cases requiring human intervention may take longer to resolve. Additionally, the agency’s outdated technology infrastructure can contribute to slower processing speeds. These delays emphasize the importance of monitoring your account and following up if discrepancies persist.

Late Filing or Payment Penalties

Outstanding balance notices may also result from penalties for late filing or late payment, even if a payment has been made. The late filing penalty is typically 5% of the unpaid tax for each month or part of a month that the return is late, up to a maximum of 25%. The late payment penalty accrues at 0.5% of the unpaid tax per month, also capped at 25%. Both penalties may apply simultaneously if the return and payment are delayed.

Taxpayers can request penalty abatement under certain conditions. The IRS’s First-Time Penalty Abatement (FTA) program offers relief for first-time offenders with a clean compliance history over the prior three years. Penalties may also be waived if the taxpayer demonstrates reasonable cause, such as illness or natural disasters. To request abatement, submit a written explanation along with Form 843, “Claim for Refund and Request for Abatement.”

Additional Interest Accumulation

Interest accumulation can increase an IRS balance even after a payment has been made. Interest begins accruing on unpaid taxes from the original due date of the return until the liability is fully resolved. Unlike penalties, interest compounds daily, potentially creating a significant financial burden over time.

The interest rate is determined quarterly, based on the federal short-term rate plus 3%. For example, if the federal short-term rate is 2%, the IRS applies a 5% annual interest rate. This compounding effect can substantially increase the amount owed, particularly if the liability remains unresolved for an extended period.

Interest continues to accrue even while disputes or corrections are being processed, making it crucial to address IRS notices promptly. Paying the disputed amount in full and seeking a refund later through Form 843 can help minimize interest charges. Alternatively, entering into an installment agreement may be an option, though interest will still accrue on the remaining balance.