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Monday, February 11, 2013

The IRS Just Sent Me $160,000. Can I Keep It?

Harvard Business Review LogoAdi Ignatius (Editor in Chief, Harvard Business Review), The IRS Just Sent Me $160,000. Can I Keep It?;

I recently received a letter from the IRS alerting me that it had made changes to my 2011 tax calculation. I've received such notices in past years. They usually affirm that, upon further evaluation, the IRS has concluded that I've underpaid my taxes by a few hundred dollars, and I obediently write a check for the required amount.

In this case, however, the change was in my favor. Significantly. A check just arrived from the U.S. Treasury, for $161,392.00.

Now what? ...

[F]riends have offered conflicting advice on what I should do. Some argue that, since I normally pay when the IRS demands more, in this case I should take the windfall. ... Others say that would be unethical. It's surely a mistake, and therefore it would be sleazy to try to keep the money. ...

What would you do?

The moral aspect is clear. This would be an ill-gotten gain. But I suspect most of us have a greedier inner self that would at least entertain rationalizations for profiting from an opportunity like this.

As a leader of my organization, however, I feel added pressure not to succumb to such rationalizations. Although this only concerns my personal finances, the fact that I serve as editor in chief of Harvard Business Review means I've implicitly accepted not only responsibility for defending the integrity of the institution, but also for having integrity myself. That means erring on the side of doing the right thing, even when the challenges may seem more gray than black or white.

(Hat Tip: Bob Kamman.)

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Comments

The author has posited an issue where there is none. If he checks his tax filing (and I would have assumed that the refund check would have been accompanied by explanatory correspondence, no?) and finds no justification for the check amount, then he's not entitled to keep any of it.
Don't deposit it in escrow, or whatever, just hold the check, contact the IRS, and return it as directed.
If he's honestly conflicted about whether to keep it or not, then he's got an integrity problem and I wouldn't lend credence to a word he writes.

Posted by: ColoComment | Feb 11, 2013 4:10:08 PM

This happens more frequently than one might think (or perhaps as frequently as one might think, depending on one's view of the efficiency of the system). The IRS will figure out it overpaid. Eventually. And come knocking on the door, so to speak.

Posted by: James Edward Maule | Feb 11, 2013 5:05:44 PM

I would like for him to just sit on the check for a while, not to ultimately keep it, but just to see if the IRS would ever catch their error. My money would be that they would not.

Posted by: Woody | Feb 11, 2013 8:38:36 PM

This is who's in charge of the Harvard Business Review? The correct inquiry is whether you in fact overpaid your taxes. What is the correct amount of your tax liability? If you overpaid and the IRS has corrected some calculations, this is not a windfall. It's rightfully yours; you should take it. If, however, the IRS has made a mistake and sent you money that is not the return of an overpayment, then you cash the check at your peril. The IRS might decide that it was an erroneous overpayment, and sue for its recovery, along with interest (which may be higher than the interest you are earning on the bank account into which you deposit your check). You say the moral aspect is clear; this too me suggests that you think the IRS made a mistake and is returning money that you rightfully owe. If this is true, I do not see this as a black or white thing: do not cash the check, not now, not ever. If they sue you for an erroneous refund (something they are unlikely to do if you do not cash the check), you can send the check back to them.

Posted by: Devil's Advocate | Feb 11, 2013 9:00:22 PM

Just to clear up an oversight by some, the author makes clear his moral and ethical decision in the article and posted it as the last sentence: And it's the message (damn it!) that means the IRS is getting its $160,000 back.

Posted by: Woody | Feb 11, 2013 11:26:32 PM

Is Mr. Ignatius serious? A taxpayer is not entitled to retain a windfall, and Mr. Ignatius has already identified this payment as a windfall. Thus, he is in possession of an erroneous refund. The IRS will reclaim the payment, and is entitled to interest on the refund from the date the erroneous refund was sent to Mr. Ignatius to the date he repays it. At current interest rates under the IRC (3% compounded daily), that means interest is running against Mr. Ignatius in the approximate amount of $13.15/day. Void the check, retain a copy of the voided check, and return it immediately to the address from whence it came with an explanatory letter disclaiming any interest in the check. BTW, Woody and Prof. Maule, lots of IRS folks read this blog. Duh.

Posted by: Publius Novus | Feb 12, 2013 10:38:04 AM

PN, just to clarify, I didn't say to cash the check, but to sit on it, meaning throw it in a drawer and see how long it takes the IRS to find its error. I'm pretty sure that there would be no interest if the original check is returned, even without a special letter.

I honestly don't think that the IRS would figure it out even after six months, so I would return it at that point, but, perhaps, directed through my Congressman's office so that he can appreciate the bad internal controls of the agency.

Posted by: Woody | Feb 12, 2013 11:28:42 AM

Having handled erroneous refund cases both administratively and in court, putting the check in your drawer for a few months is pretty low on the list of possible courses of action I would ever discuss with a client. I would promptly hand deliver the check to the TP Advocate's office, keeping a copy of the check and a signed receipt acknowledging return of the check from the Advocate's Office. The Advocate's office will say it is not their job to deal with that kind of problem, and my response would be that I don't trust anyone else at the IRS to get it right given that they sent out the erroneous refund.

Posted by: Don de Drain | Feb 12, 2013 2:44:15 PM

Question: if one merely sits on the check, why should interest accrue to the IRS? The funds have never been drawn from the IRS's bank account, much less been credited to any account of the recipient.

Woody, great idea re: go through Congress person's office.

The author presents the situation as creating a moral dilemma. Indeed, he says that some friends advise him to "take the money." Yes, he concludes that he is not entitled to the funds, but he might have obtained greater mileage out of the incident if he had used the tactic suggested by Woody and used it to highlight the horrible internal controls of the IRS.

Posted by: ColoComment | Feb 12, 2013 4:14:48 PM

Let's make one other thing clear -- what I would advise a client to do and what I wish someone else would do are two different things. I'm the kid who sits quietly in the room laughing at what others are doing.

Posted by: Woody | Feb 12, 2013 5:21:49 PM

I think under the Code interest on the erroneous refund runs from the date of payment, and there is an argument to be had that date of payment means the date on the check. If that argument were to prevail, putting the check in a drawer obviously would be wrong thing to do. I do not think that argument would prevail, however, and I am unaware of any case that holds that interest on an erroneous refund runs from date on the check, as opposed to date of deposit. If you give them the check back when they write you for it, I think they'll take it. I cannot believe that they'll sue you if you do not cash the check. I do not believe that levy powers can be used in most instances to recover an erroneous refund.

Posted by: Devil's Advocate | Feb 12, 2013 7:33:31 PM