State Income tax refund not filed?

[Murazor]

IRS has notified me of a reported state tax refund in my 2019 Form 1040. This is strange since I have filed using Turbo Tax from may years and this information is always (correctly) carried over. When I look at my 1040 however, there is no evidence that I can see of the state tax refund being reported. I can only see the refund showing up in a Federal Carryover Worksheet (as well as the State Carryover Worksheet), so the tax refund does indeed show up in some places. How can this be corrected?

[JotikaT2]

If the IRS has notified you of the change and issued a letter of adjustments, you may not need to do anything.  You would only need to reply to the notice if you disagree with the findings from the IRS.  You should follow the instructions as provided on your letter and take action if instructed on that letter.

In general, your state refund will either be fully taxable or even partially taxable depending upon how much the deduction affected your refund or tax liability.  

To determine how much is taxable, all 3 of the following must be true: 

• You itemized deductions last year 
• You claimed state and local income taxes 
• Claiming the deduction helped you increase your federal refund or lower your tax bill 

State tax refunds taxation

[Murazor]

Thank you for your quick reply.

I am not sure what exactly is wrong, but IRS has sent me a CP2057 saying "You many need to file an amended 2019 Form 1040X". My problem is that the state tax refund does not appear on the Form 1040 worksheet schedule 1. Part  I 1. is "0" (zero) which is where I would expect the state tax refund to show up. It therefore also does not turn up as income on the 1040. There is a "(see instr.)" but I don't know where to find them or if those instructions are what you wrote. I tried to file a 1040X though Turbo Tax, but that form turned out empty since there were no changes (i.e. the state tax refund is already there.) I have no idea how to resolve this and don't want to incur interest and penalties.

Thanks again!

[DawnC]

You have reported the state refund, but you are not seeing it on Schedule 1 because TurboTax determined that it was not taxable.   Did you itemize deductions on your 2019 tax return?  If not, it is not taxable.   I believe the CP 2057 was automatically sent out, but it is more than likely that you do NOT need to file the amendment.   Especially if you went through the 1040X and there was no change.   The notice is not going to change the amount of your refund, but it is going to cause a bit of a delay.   I have seen a few of these notices regarding the state refund - none required amending but the refunds were delayed by a few weeks.   If the notice requests a response or there is an option to respond, do so.   But if it does not and you know the state refund is not taxable, just wait a little longer.   

Whether or not your state income tax refund is taxable on your federal income tax return depends on whether you took an itemized deduction Schedule A for the tax that was later refunded.

• Don't report any of the refund as income if you didn’t itemize your deductions on your federal tax return for the tax year that generated the refund.
• If you took an itemized deduction in an earlier year for taxes paid that were later refunded, you may have to include all or part of the refund as income on your tax return. Use Worksheet 2, Recoveries of Itemized Deductions in Publication 525, Taxable and Nontaxable Income to determine the taxable amount of your state or local refunds to report on your tax return.   Based on your answers in TurboTax, the refund is not taxable and should not be included on Schedule 1.    The worksheet in the link is what TurboTax uses to figure the amount of your state tax refund that is taxable.  This link will take you directly to the worksheet, but you only need it if you itemized last year.  

TurboTax has an accuracy guarantee in the very unlikely event that a calculation error causes you to owe any interest or penalties on your tax return.  

[Murazor]

Hello,

The 2019 filing uses itemized deductions.

The refund was payed out last year so I'm not waiting for anything, either federal or state.

It looks like the Publication 525 calculation resulted in a zero and that is what is in Schedule 1.

How do I respond to the IRS? Do I just wait for nothing to happen or how do I get this to go away?

Thanks again.

[BillM223]

When I read your description, it sounds for all the world to me that the state gave you a refund, but you never received the 1099-G so did not enter it into your return.

This refund would not "carry over" from a previous year, and the calculation that Jotika and Dawn speak of would only happen if you got the 1099-G and actually entered it into your return.

The IRS must have told you what year this state refund applied to and may have told you what year the refund is from (if not, that would be on the 1099-G). 

So did you get a 1099-G for the year that the IRS says you should have gotten? 

[Murazor]

No, I definitely got the 1099-G and the amount was entered into the TY2019 federal filing.

[BillM223]

OK, so you entered the refund (good).

"I can only see the refund showing up in a Federal Carryover Worksheet"

I am not sure what this is referring to, and it's not germane anyway. For which year are you looking at the Federal Carryover Worksheet?

What is germane is the Federal Carryover Worksheet for 2019, because it should have the value for your Itemized Deductions in 2018. Of course, if the refund was from a year prior to 2018, then TurboTax would be dependent on your input, unless it was smart enough to look at your Tax History (another worksheet) where itemized deductions for the last 5 years are shown. (I don't know if TurboTax does this or not - in any case, I am pretty sure that you are invited to enter the amount when entering the 1099-G).

So if TurboTax calculated zero for the taxable amount of the refund, then it seems that what TurboTax had for itemized deductions (whether through the Carryover Worksheet or the Tax History worksheet or through your own data entry) was not the same as what the IRS has.

So go look at the IRS letter and see if it described how they arrived at the conclusion that some of the refund was taxable. Then go compare what the IRS says (the itemized deduction amount is the most likely problem) with what was on your tax return for the year that the refund came from (2018? earlier?).

If you show a different number, then make a photocopy of the relevant pages on your return, write out the calculation that Jokita and Dawn described, and send the response back to the IRS. They will always give you at least one chance to explain why their adjustment is wrong (but always reply on time!).