IRS Holds My Refund

Today TaxMama hears from Jelani, in the TaxQuips Forum with a problem. “I have a hold on my 2010 tax refund. The IRS says that in 2007, 2008, 2009 I paid enough mortgage interest to file taxes on, but I haven’t filed since 2005. The mortgage payments that I made were made using the equity of the properties, not from any income I was receiving. The IRS says I have the option of filing taxes for these years or writing a letter explaining how I was able to make these payments without filing taxes.

What exactly should I say in the letter? Or should I file tax returns for those years?”

Dear Jelani,

Sigh, well this is one of the reasons I always tell people – file a tax return every year – even if IRS says you don’t need to. Why would IRS tell people not to file if you don’t have income, then penalize them when they don’t? Because they don’t know if you need to file a tax return or not – until you tell them.

So, what do you do now?  This is what I would do – to close the statute of limitations on audit on all those other years.

1) Prepare a paper tax return for each open year.

2) Since you have no taxable income – you must prove to IRS what you’re living on. IRS is looking for unreported income.

a)       If you have been drawing money from savings, save time. Provide copies of your savings account balances and draws.

b)       If you have been living on draws from home equity lines or real estate loans – show IRS where you drew the money from. Include copies of the loan statements showing your draws.

c)       Wherever you pulling non-taxable cash from – show IRS. Treat this like a mini-audit.

 3) Include the copies with the tax returns when you file them

4) Send them certified mail, proof of delivery requested

5) Make an extra copy of all the tax returns you are filing and send them in to the IRS office that sent you the notice about the hold on your refunds. 

Doing BOTH of these things will protect you from future audits AND get your refunds released now.

And remember, you can find answers to all kinds of questions about how get caught up with tax filings and other tax issues, free. Where? Where else? At

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