What Is IRS CP63 and How Does It Affect Your Tax Refund?
Learn how IRS CP63 affects your tax refund, why you received it, and the steps needed to resolve outstanding tax issues efficiently.
Receiving a notice from the IRS can be concerning, especially when it affects your tax refund. One such notice, CP63, informs taxpayers that their refund is being held due to outstanding federal tax returns from previous years. This can create financial stress for those expecting a refund, making it important to understand why this happens and what steps need to be taken.
Purpose of IRS CP63
The IRS issues CP63 to notify taxpayers that their refund is being withheld due to unfiled tax returns. This ensures compliance with federal tax laws, as failing to file required returns can indicate potential underreporting of income or unpaid tax liabilities. The notice prompts individuals to address their filing obligations before receiving any refund.
This is not an assessment of additional tax but a procedural step to enforce compliance. Under 26 U.S. Code 6402, the IRS has the authority to hold refunds when a taxpayer has outstanding tax issues. If multiple years of returns are missing, the IRS may estimate tax liability based on available income documents such as W-2s and 1099s. These estimates often result in a higher tax assessment than if the taxpayer had filed properly.
In some cases, CP63 precedes further enforcement actions, such as issuing a Substitute for Return (SFR) under 26 U.S. Code 6020(b). This allows the IRS to file a return on behalf of the taxpayer using estimated figures, which typically leads to a higher tax bill. If the taxpayer does not respond, the IRS may proceed with collection efforts, including levies or liens.
Eligibility Criteria for the Notice
A CP63 notice is issued when the IRS detects at least one missing tax return. The agency identifies these gaps through employer-reported income documents, such as W-2s and 1099s, which indicate taxable earnings that have not been reconciled with a tax return.
A history of non-compliance increases the likelihood of receiving CP63. This is common among self-employed individuals and independent contractors, who do not have taxes withheld by an employer and must report their income accurately.
The IRS may also issue CP63 if discrepancies exist between reported income and past filings, suggesting additional tax may be owed. If third-party reports indicate unreported income, the IRS may flag the account and require the missing returns before releasing a refund.
Essential Documents and Filings
To resolve a CP63 notice and secure a withheld refund, taxpayers must file any missing federal income tax returns. The IRS provides transcripts through its Get Transcript tool, which helps verify reported income. Wage and Income Transcripts list earnings from employers, banks, and brokerage firms, ensuring all taxable income is accounted for.
Taxpayers should gather relevant documents, including Form 1098 for mortgage interest, Form 5498-SA for Health Savings Account contributions, and Form 8862 if reclaiming previously disallowed credits. Self-employed individuals should maintain records of business expenses, such as receipts and mileage logs, to reduce taxable income.
If the IRS has created a Substitute for Return (SFR) based on third-party data, taxpayers must submit their own return with correct figures to override the IRS’s estimate. This often results in a lower tax liability, as the IRS-prepared return does not include deductions or exemptions. Filing an accurate return with supporting documentation, such as Schedule C for business owners or Form 2441 for child care expenses, ensures proper processing.
Potential Consequences for Ignoring It
Failing to address a CP63 notice can lead to financial and legal consequences. The IRS imposes a failure-to-file penalty under 26 U.S. Code 6651(a)(1) of 5% per month on unpaid tax, up to a maximum of 25%. If tax is also owed, the failure-to-pay penalty under 6651(a)(2) adds an extra 0.5% per month, increasing the total amount due. These penalties compound over time.
Ignoring CP63 can also trigger enforced collection actions. The IRS has broad authority under 26 U.S. Code 6331 to issue a levy against wages, bank accounts, and Social Security benefits if tax debts remain unresolved. A tax lien under 26 U.S. Code 6321 may be placed on a taxpayer’s property, which can affect loan approvals and refinancing. Federal tax liens are publicly recorded, making them visible to financial institutions and potential creditors.
Income Tax Refund Hold and Offsets
When a CP63 notice is issued, the IRS holds the taxpayer’s refund until all required tax returns are filed and processed. Even if a refund is due for the current year, it will not be released until the missing filings are submitted. The length of the hold depends on how quickly the taxpayer resolves their outstanding obligations.
If the necessary returns are filed and show no additional tax liability, the refund may be issued once processing is complete. However, if taxes are owed for prior years, the refund may be reduced or entirely offset to cover the outstanding balance.
Offsets occur when the IRS applies a taxpayer’s refund to unpaid federal tax debts or other government obligations. Under 26 U.S. Code 6402(a), the IRS has the authority to redirect refunds toward unpaid taxes before issuing any remaining balance to the taxpayer. If additional debts exist, such as unpaid child support, past-due student loans, or state tax liabilities, the Treasury Offset Program (TOP) may also intercept the refund. Taxpayers can check the status of their refund and potential offsets by calling the Bureau of the Fiscal Service’s TOP hotline or reviewing their IRS account online. If a refund is offset, the IRS will send a notice explaining where the funds were applied.
Contacting Tax Professionals
Addressing a CP63 notice can be complex, especially if multiple years of unfiled returns or outstanding tax debts are involved. Seeking assistance from a Certified Public Accountant (CPA), Enrolled Agent (EA), or tax attorney can help ensure filings are completed accurately and in compliance with IRS regulations. Professionals can also assist in negotiating payment plans or penalty abatements if a taxpayer owes a significant amount.
For those facing financial hardship, the IRS offers options such as Currently Not Collectible (CNC) status or an Offer in Compromise (OIC) under 26 U.S. Code 7122, which allows taxpayers to settle their tax debt for less than the full amount owed. A tax professional can evaluate eligibility and help prepare the necessary documentation. If a taxpayer believes the IRS has made an error in assessing their tax liability, they can file an appeal through the Office of Appeals, which operates independently from IRS enforcement divisions.