Among taxpayers' misconceptions about taxes are several focused on refunds, Accounting Today reported. Based on reports from tax preparers and the IRS, the publication listed seven of those wrong ideas.
One is that a bigger refund is better. Preparers often need to tell their clients that they want the smallest refund possible; otherwise, by overpaying their withholding or estimated taxes, they’re basically giving the IRS and interest-free loan.
Morris Armstrong, an enrolled agent and registered investment adviser at Armstrong Financial Strategies, said, “Getting a large refund usually means your planning was bad.”
A second misconception is that filing earlier will yield a faster refund. Accounting Today observed that rushing to file a return can lead to mistakes.
Third, some clients believe that calling the IRS, their tax preparer or their software provider will offer the most accurate date for when they will receive their refunds. In reality, the best way to check the status of a refund is with the Where's My Refund? page on the IRS website or the IRS2Go app. There is an automated IRS refund hotline at (800) 829-1954, but the hotline has the same information about current tax year refunds as Where's My Refund?, so there’s no need to call it unless Where's My Refund? says to do so.
A fourth misconception is that state tax refunds are taxable on the next year’s federal return. The IRS has stated, “Most taxpayers receiving state tax refunds do not have to include the state tax refund in income for federal tax purposes. As a general rule, taxpayers who choose the standard deduction on their federal income tax returns do not owe federal income tax on state tax refunds.”
In addition, some taxpayers believe that everyone’s refund is late. In reality, the IRS has said that it issues nine out of 10 refunds within 21 days. However, it’s possible that some tax returns may require further review and could result in the refund being delayed.” Accounting Today noted that claims for the Earned Income Tax Credit or the Additional Child Tax Credit can slow down the processing of returns, especially early in the filing season. In addition, wrong or incomplete returns can also result in late refunds.
Sixth, some clients also complain that their refund was lower than they expected. Accounting Today observed that the IRS will send taxpayers a letter through the U.S. mail if it adjusts a refund. Another possibility is that the Department of Treasury’s Bureau of the Fiscal Service might send a letter if a refund was lowered in ordered to pay for other financial obligations.
Finally, some clients believe that because they received a refund, they don’t have to change their withholding. Accounting Today noted that this belief may or not be true. Taxpayers can check by using the IRS’s Withholding Estimator.
"They have an idea, but withholding tables are universal and your return is individual and often they don't jive,” Armstrong said.