Can You Trust Unexpected IRS Checks?

Unexpected IRS Refund? What You Should Know and Smart Ways to Spend It

Receiving an unexpected check from the IRS can feel like winning a small lottery. However, before you start planning that dream vacation or shopping spree, it's important to take a step back and consider the bigger picture. As Christians, we are called to be good stewards of all our resources, and that includes unexpected financial gains. An unexpected tax refund presents a unique opportunity to align your finances with God's plan and make intentional choices about how to use it¹. In this blog post, we'll explore the reasons for an unexpected refund, the potential tax implications, and smart ways to spend it while aligning with Biblical principles. But before you decide how to use it, there’s an important question to consider—Can You Trust Unexpected IRS Checks?

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Why Did I Receive an Unexpected Refund?

There are several reasons why you might receive an unexpected IRS refund. Some common reasons include:

• Overpayment of Taxes: This can happen if you had too much withheld from your paycheck throughout the year³. Life changes like having a child or getting married can affect your withholding, so it's crucial to update your W-4 with your employer accordingly. To do this, you'll need to fill out a new W-4 form and submit it to your employer. The form asks for information about your filing status, dependents, and other factors that affect your withholding. You can find the form and instructions on the IRS website³.
• Overestimation of Taxes: Self-employed individuals and freelancers often make estimated tax payments. If you overestimated your tax liability or didn't account for all deductible expenses, you might receive a refund³.
• Tax Credits: Certain tax credits, like the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit, are refundable. If these credits exceed your tax liability, the excess will be refunded to you³.
• Recovery Rebate Credit: The IRS is issuing Recovery Rebate Credits in 2024 and 2025 to taxpayers who were eligible for stimulus payments in 2021 but didn't claim them on their 2021 tax returns³.
• IRS Errors: Though less common, errors in tax calculations or processing can also lead to unexpected refunds⁴. For example, in 2018, the IRS made an error in the instructions to the Schedule D tax calculation worksheet, resulting in some taxpayers receiving larger refunds than expected⁴.
• Penalty Abatement: The IRS may abate penalties for underpayment of estimated taxes in certain situations. If you qualify for this abatement, you might receive a refund of the penalty amount⁴.
• Audits: While often associated with owing more taxes, audits can sometimes result in a refund if the IRS discovers an error in your favor³.

Beware of IRS Refund Scams

Unfortunately, unexpected refunds can also be a sign of a scam. Scammers often prey on people's unfamiliarity with tax procedures to steal money or personal information. Here are some common IRS refund scams to watch out for:

• Fake Checks: Scammers may send fake refund checks in the mail and then contact the recipient, claiming that the IRS sent too much money by mistake. They'll then demand the "extra" money be sent back, often through a wire transfer or prepaid card⁵.
• Phishing Emails and Phone Calls: Scammers may contact people by email or phone, pretending to be from the IRS. They might claim there's a problem with your refund and ask for personal information like your bank account details or Social Security number to "fix" it⁵.
• Fake Online Portals: Scammers may create fake IRS websites that look real to trick people into entering their personal information⁵.

How to Avoid Scams:

• Be Suspicious: The IRS generally initiates contact through regular mail. They rarely contact taxpayers by email, text, or social media, especially regarding bills or refunds⁶.
• Don't Click on Links: Never click on links in suspicious emails or text messages. Instead, go directly to the official IRS website (irs.gov) for information.
• Verify Information: If you receive an unexpected refund or communication from someone claiming to be from the IRS, don't hesitate to contact the IRS directly to verify the information.

Tax Implications of an Unexpected Refund

It's important to understand the tax implications of an unexpected refund. If the IRS made an error, you might be required to return the funds⁷. Interest may accrue on erroneous refunds, so it's crucial to address the situation promptly⁷.

The IRS has a three-step process for recovering erroneous refunds:

1. Identify the Category: The IRS categorizes erroneous refunds based on the type of error that caused them⁹.
2. Correct the Error: The IRS takes action to correct the error that led to the refund, such as reassessing your tax liability⁹.
3. Recover the Refund: The IRS uses collection procedures to recover the erroneous refund amount⁹.

If you receive a refund check that you believe is erroneous, do not cash it. Contact the IRS immediately to clarify the situation and follow their instructions for returning the funds⁴. You can reach the IRS by phone or mail. They might require you to provide documentation or complete a form to initiate the refund return process. Failing to return an erroneous refund can result in penalties and interest.

Smart Ways to Spend an Unexpected Refund

An unexpected refund can be a great opportunity to improve your financial situation and align your finances with Biblical principles of stewardship. Here are some smart ways to spend it:

• Pay Down High-Interest Debt: Proverbs 22:7 states, "The rich rules over the poor, and the borrower is the slave of the lender." High-interest debt, like credit card debt, can be a significant burden. Use your refund to pay it down or eliminate it completely³.
• Build an Emergency Fund: Having an emergency fund provides financial security and peace of mind. Aim for 3-6 months of living expenses in a readily accessible account³. This will help you weather unexpected events like job loss or medical emergencies without having to resort to debt.
• Invest in Your Retirement: Proverbs 6:6-8 encourages us to be like the ant and prepare for the future. Consider contributing to a Roth IRA or traditional IRA to grow your retirement savings³.
• Invest in Your Education or Career: Investing in yourself can lead to increased earning potential and career advancement. Use your refund to pursue further education, gain new skills, or obtain certifications¹⁰. This could involve taking classes, attending workshops, or pursuing online courses.
• Save for Your Children's Future: Proverbs 13:22 states, "A good man leaves an inheritance to his children's children." Consider using your refund to contribute to a 529 college savings plan or start a savings account for your children³.
• Make a Necessary Purchase: If you have a significant purchase that you've been putting off, such as a car repair or home improvement, your refund can help you cover the cost¹¹.
• Give to Charity: 2 Corinthians 9:7 encourages cheerful giving. Consider donating a portion of your refund to your church or a charitable organization that aligns with your values.

It's important to prayerfully consider your individual circumstances and long-term goals when deciding how to spend your refund². What might be the best option for one person might not be the best for another. Seek wise counsel from trusted financial advisors or mentors who can help you make informed decisions that align with your values and God's plan for your life.

Biblical Principles of Stewardship

As Christians, we are called to be good stewards of all that God has given us, including our finances. Here are some Biblical principles to keep in mind when managing your unexpected refund:

• God Owns It All: Acknowledge that everything we have ultimately belongs to God and we are merely managers of His resources².
• Faithfulness and Integrity: Manage your finances with honesty, diligence, and wisdom².
• Prioritize God: Seek God's guidance in your financial decisions and use your resources to further His kingdom¹³.
• Contentment: Cultivate contentment with what you have and avoid the trap of greed¹³.
• Planning: Proverbs 21:5 states, "The plans of the diligent lead surely to advantage." Create a financial plan that aligns with your values and goals².

Conclusion

Receiving an unexpected IRS refund can be a blessing, but it's important to approach it with wisdom and discernment. By understanding the reasons for the refund, the tax implications, and smart ways to spend it, you can make the most of this financial opportunity while honoring God with your resources.

Remember, this isn't just about managing money; it's about aligning your finances with God's purpose for your life. Seek His guidance in your financial decisions, be faithful in your stewardship, and use your resources to bless others and further His kingdom. This unexpected refund can be a stepping stone to greater financial freedom and an opportunity to live out your faith in a tangible way.

Works cited

1. Taxes, Integrity, and Christian Stewardship - Good Sense Movement, accessed January 31, 2025, https://goodsensemovement.org/taxes-integrity-and-christian-stewardship/
2. Biblical Principles on Financial Stewardship- White Paper | Grace Chapel, accessed January 31, 2025, https://www.gracechapel.org/white-papers/biblical-principles-on-financial-stewardship-white-paper/
3. Received an Unexpected IRS Refund? Here's What It Means and What to Do - Investopedia, accessed January 31, 2025, https://www.investopedia.com/unexpected-irs-refund-what-to-do-8773785
4. Did You Receive an Unexpected Tax Refund? - Trout CPA, accessed January 31, 2025, https://www.troutcpa.com/blog/did-you-receive-an-unexpected-tax-refund
5. IRS Refund Check Scam: A Comprehensive Guide - Centier Bank, accessed January 31, 2025, https://www.centier.com/resources/articles/irs-refund-check-scam--a-comprehensive-guide
6. Dirty Dozen: Watch out for scammers using email and text messages to try tricking people during tax season | Internal Revenue Service, accessed January 31, 2025, https://www.irs.gov/newsroom/dirty-dozen-watch-out-for-scammers-using-email-and-text-messages-to-try-tricking-people-during-tax-season
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8. Topic no. 161, Returning an erroneous refund – Paper check or direct deposit - IRS, accessed January 31, 2025, https://www.irs.gov/taxtopics/tc161
9. 21.4.5 Erroneous Refunds | Internal Revenue Service, accessed January 31, 2025, https://www.irs.gov/irm/part21/irm_21-004-005r
10. 6 Smart Ways to Use Your Income Tax Refund - Discover, accessed January 31, 2025, https://www.discover.com/credit-cards/card-smarts/ways-to-use-your-tax-refund/
11. How to Spend Unexpected Money: Tax Refund, Bonus, or Gift - Britannica, accessed January 31, 2025, https://www.britannica.com/money/what-to-do-with-a-windfall
12. What Is Biblical Stewardship? | Christian Financial Advisor, accessed January 31, 2025, https://gracefinancialadvisors.com/blog/what-is-biblical-stewardship
13. Biblical Financial Principles and 5 Practical Steps to Live by Them - FaithFi, accessed January 31, 2025, https://www.faithfi.com/christian-stewardship-network/biblical-financial-principles-and-5-practical-steps-to-live-by-them-5661