IRS did not comply with what my Ttax return said they would do

[laurag25]

My 2022 1040-X amended return's .PDF copy very clearly stated on the first summary page:

"Your federal amended tax return shows a refund due to you in the
Due/ | amount of $[XXX]. Your tax refund will be direct deposited into your Refund | account."

The refund was due to a correction to my reported foreign passive (dividend) income. 

I never received such a direct deposit, instead the IRS merely adjusted my foreign credit carryover for the amount stated.  Should I have gotten a refund deposit instead of the adjustment? What can I do about this?

[MaryK4]

Can you clarify if you received a Notice of Adjustment?  This would have the details of the adjustment- it is possible that when they calculated the foreign tax credit, there was a limitation based on the passive income which would create the credit carry forward as opposed to the refund.  

It is also very likely that you can request the refund by send a protest to the decision.   You can call the IRS at 800-829-1040 7 a.m. to 7 p.m. local time.

[laurag25]

I have never received a notice of adjustment from the IRS. It merely shows up as an adjustment to the carryover foreign credit table.

If I decide not to do anything about it now, would it eventually be taken into consideration by the IRS if I were ever to be audited?

[laurag25]

But it does appear on my 2023 return on table III. Foreign Tax Credit Computation, Foreign Tax Credit Carryover Adjustments table, col. C (specially typed in as "2022 amendment".  Could this signal that it is deliberate on the IRS's part?

[DaveF1006]

The conversion of a requested refund into a Foreign Tax Credit (FTC) carryover is the preferred method the IRS uses to handle a situation like yours. 

You can only use foreign tax credits to lower the U.S. tax on the same foreign income. If the tax you paid is higher than the U.S. tax on that income, you won’t get the extra amount back as a refund. Instead, any unused credits are carried forward to future years.

Yes, it was a deliberate act on the IRS part because of the way they treat any unused credits. The fact that it appears on your 2023 return in Table III (Carryover Adjustments) with the note "2022 amendment" confirms the IRS processed your 1040-X. They didn't ignore it; they re-calculated your Form 1116 and determined that the benefit belonged in your carryover section rather than your bank account.

Since the IRS adjusted your Foreign Tax Carryover, they will consider this if you were audited. You shouldn't need to do anything now since you filed your amendment and your amendment was processed. You handled this correctly.

[laurag25]

I did not receive a Notice of Adjustment from the IRS, but Turbo Tax incorporated the adjustment into my 2023 return! The adjustment on my 2023 return is labeled as such in col. A on the 1116 worksheet. What happened here?

[DaveF1006]

This sounds like a dividend adjustment. The IRS requires you to adjust your foreign income on Line 1a if that income was taxed at the lower preferential rates (0%, 15%, or 20%) rather than your ordinary income tax rate.  The Foreign Tax Credit is meant to prevent double taxation, but the IRS doesn't want to give you a "full value" credit for income that was already taxed at a lower rate in the U.S.

For example, if you had $1,000 in foreign qualified dividends, TurboTax applies a multiplier (often around 0.4054 or 0.5405 depending on your tax bracket) to "shrink" that income. This ensures the credit is proportional to the actual U.S. tax you paid on those dividends.  

TurboTax only skips the adjustment if you meet both of these tests for 2023. If you were even $1 over, the software correctly applied the adjustment:

1.  Your total foreign qualified dividends plus foreign long-term capital gains must be less than $20,000.
2. The Income Test: Your 2023 Taxable Income (Form 1040, Line 15) must be below:

• Married Filing Jointly: $364,200 
• Single / Head of Household: $182,100
• Married Filing Separately: $182,100