IRS Notice 54: Why Your Tax Refund Was Adjusted

An IRS notice informing you of a change to your tax refund is a common communication tool used by the agency. These notices, often designated with a “CP” number like CP12, are sent when the IRS adjusts your tax return, resulting in a refund amount that is different from what you originally calculated. This automated process is distinct from a formal tax audit, which is a much more in-depth examination of your financial records.

Common Reasons for Refund Adjustments

The IRS may adjust a tax refund for several reasons. Simple mathematical errors are a frequent cause, such as transposing numbers or miscalculating limitations on certain deductions.

Another prevalent reason for an adjustment involves tax credits and deductions. The rules for claiming credits like the Child Tax Credit or the Earned Income Tax Credit (EITC) are precise, and errors in applying them can lead to changes. For example, a taxpayer might miscalculate the phase-out of a credit based on their adjusted gross income (AGI) or fail to meet the residency or relationship tests for a qualifying child. Issues with the Recovery Rebate Credit have also been a common source of adjustments if the amount claimed does not match IRS records.

A refund may also be reduced if a dependent claimed on your return was also claimed by another taxpayer. The IRS has tie-breaker rules to determine who has the valid claim, and if its records show another person has a superior claim, it will disallow the dependent on your return and adjust your refund accordingly. This can happen in shared custody situations.

Finally, your refund could be subject to an offset. The IRS is required to use your refund to pay certain other outstanding debts through the Treasury Offset Program (TOP). These can include:

• Past-due federal or state income taxes
• Delinquent child support payments
• Federal non-tax debts like student loans
• Certain unemployment compensation debts

If your refund is offset, you will receive a notice from the Treasury Department’s Bureau of the Fiscal Service explaining the reduction and where the funds were sent.

Reviewing Your Notice and Tax Return

The first step after receiving a notice is to review it carefully. The notice will contain a section, often labeled “Explanation” or “Changes to Your Tax Return,” that details what the IRS changed. This section provides a side-by-side comparison, showing the figures you reported, the figures the IRS calculated, and the difference between them.

With the notice in hand, locate your copy of the Form 1040 tax return you filed for that year. Compare the lines referenced in the IRS notice with the corresponding lines and schedules on your return.

Following the comparison, verify your information using your supporting documents. These include your W-2s from employers, 1099 forms for other income, and any receipts or records that substantiate the deductions or credits you claimed. This review will help you determine if the IRS correction is accurate.

How to Respond to the IRS

If you agree with the IRS’s changes, no further action is required. You can cash or accept the direct deposit of the adjusted refund amount. It is advisable to make a note of the correction on your copy of the tax return and keep the notice with your tax records.

If you disagree with the adjustment, you must prepare to formally dispute the change. Gather the IRS notice, a copy of your tax return, and any supporting evidence that proves your position. For instance, if the dispute is over a dependent, you might need school or medical records to prove residency. If it concerns a deduction, you would need the corresponding receipts or bank statements.

You have two primary methods for contacting the IRS: by phone or by mail. The notice will provide a specific phone number to call. Before calling, have your Social Security Number, the tax year, and the notice number from the notice ready. Be prepared to explain why you believe the adjustment is incorrect and reference your supporting documents.

Alternatively, you can respond in writing, which is recommended for creating a formal record. The notice will include a response form or provide an address for correspondence. Your written response should include your name, address, Social Security Number, and the relevant tax year.

You must clearly state that you disagree with the adjustment, explain why, and include copies (never originals) of the notice and all your supporting documents. Sending the letter via certified mail with a return receipt is a good practice to confirm the IRS received it. You must respond by the deadline specified in the notice, typically 60 days, to protect your appeal rights.