am I need to report 1099-INT from IRS if I returned check

[mm1232]

So here is a situation I had in 2023.

I received a paycheck from the IRS, which included a return, interest on it, and an overpayment IRS did.
So I followed instructions on the topic of Errornos Check, voided it, and sent it back to the IRS with an explanation. 4 months after that they confirmed that they received it. I assume it arrived in a week and they spent almost 4 months processing it.

This year IRS sent me 1099-INT form.

So I read Pub 550 and Pub 538 and it's there a definition of "Constructive receipt" in both publications.

So the first publication - is about interest and the second - is about income regarding the cash method.

Plus in 538 I can see a special tip, saying
"You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. You must report the income in the year the property is received or made available to you without restriction. "
So looking at both definitions I came to conclusions:
- There cannot be two different definitions of the "Constructive receipt" term depending on the case. So they are both legit just the second one is a bit concrete compared to the first and has an example related to my case.
- As there are examples of uncashed checks that cannot be used to postpone income, then it means that it's the nature of the check, to commit receiving. It's just not allowed to be used in that case.
- I have exactly that situation in the tip with the difference that I returned it to the IRS per instruction and I didn't postpone anything intentionally for that specific purpose.
- I was unable to cash part of the check ie interest only cos in this case I would take overpayment as well.

So for me, it looks like I do not need to add 1099-INT for the 2023 return, but are there any thoughts about it?
Are there any options for 1099-INT if I'm on the standard deduction to report it but do not have it taxed, so I will tax it in a year when I finally receive it and cash it?

[MonikaK1]

It depends. Why did you return the IRS check, and why do you expect to receive it again? 

The IRS pays interest on tax refunds when mandated by law. A "return" is the form you file; any excess tax paid over taxes owed that you receive back is a "refund". 

In general, the IRS pays interest on the amount you overpay starting from the later of the:

• Tax return filing due date
• Late filed tax return received date
• Date we get your return in a format they can process
• Date the payment was made

They stop paying interest on overpayments on the date they refund your overpayment (and interest) or offset it to an outstanding liability.

Exception: They have administrative time (typically 45 days) to issue your refund without paying interest on it. See here for more details.

If you returned a check because it was paid in error, so you wouldn't be entitled to it, then the interest isn't taxable.

If the 1099-INT was issued in error, to account for the Form 1099-INT on your tax return, you could enter the form in TurboTax. When you get to the screen that asks if any of the following situations apply, you could select "I need to adjust the taxable amount" and then on the following screen, enter the amount again. The amount would then appear on the return as both a positive and a negative number. In the alternative, you could enter the negative number under Other Reportable Income with an explanation.

If you are issued a check by the IRS that includes interest, and you don't return it, then the interest is taxable.

[mm1232]

I'm entitled to a refund amount and interest. It was processed during 6 months, not 45 days.

A reason I returned, is cos I claimed payment I made after 15 of Jan, and it was part of the return, but they also included it on top of the refund. So in fact I received this payment twice but was supposed to have just once.
So I'm not entitled just for part of the check they sent. I can't take just interest and return the check.
I hope it answers your questions to help clarify the case.

[DianeW777]

Yes, as indicated by @MonikaK1, you are not required to report interest you did not receive.  Since you paid back an amount you were required to because you were paid twice and did return the money that wasn't yours to keep, report only interest  you did receive and did keep.  

Keep records in your file so that if necessary you can explain that you did not actually receive all the interest.

@mm1232 

[mm1232]

what if I report 1099-INT those interests and subtract those interests (the same amount) in Schedule 1 Line 8z as negative income with an explanation?

Let's say - they sent me 1099-INT, so I reported it and removed the full amount of the interest to make it not taxable and will add it again once they will resend it to me next year or whenever they want to.

So in this case even if in the future, despite what I see in Pub 538 about "Constructive receipt" they would decide that I received income - I will just pay tax on it + fees and will do an amendment.
Cos I think in this case I will cover most negative scenarios so they wouldn't blame me on non-reporting income.

[MonikaK1]

Yes, you can report the interest item so that the IRS information return matching program will find it, and make an adjustment to the item to subtract it with an explanation as mentioned previously. 

You returned the check, so the doctrine of constructive receipt isn't applicable in that situation. Use constructive receipt to determine when an item of income you received is taxable.

For example, if you receive a check in the mail that includes taxable income at the end of 2024, but you don't deposit it into a bank account until 2025, it's still taxable in 2024.

[mm1232]

>>constructive receipt isn't applicable in that situation.

I was about to write about it in an explanation.
Per my understanding, we have the definition (or doctrine) "constructive receipt" and the condition of it wasn't executed as I didn't receive anything and returned the check to the IRS and never had access to any part of the check.

Is it the wrong understanding?
What better to write to the IRS in terms of Pub 550 or 538?
I can write something like - per "constructive receipt" doctrine I never had access to the interest, so consider it as not taxable in the year 2023. Once it is available to me in terms of "constructive receipt" I will add it to the tax return for that year.

OR
taking into account the "constructive receipt" definition from pubs I came to the conclusion that I didn't receive
interest in 2023 for taxation purposes and will add it to my tax return for the year when I will have constructive receipt of those interests. For 2023 I'm reporting it as I did receive form 1099-INT from the IRS and subtracting in Schedule 1 line 8z as it was sent back to the IRS. Receipt from USPS attached.

[Vanessa A]

"I didn't receive anything and returned the check to the IRS and never had access to any part of the check"  

When the check was in your hand, you had total and complete access to it.  What you chose to do with it, is not relevant when you are determining constructive receipt.  The fact that you had the choice to return it, says you received it and in your hand. You could have cashed the check, kept the interest (IF you were entitled to it) or any number of things.  So again, this is not an argument of constructive receipt. 

The thing is, if you returned the check that you received in error, and were not entitled to any part of the check at all, then you can contact the IRS and discuss this with them to see if they will correct it on their part.  If you returned the check and interest you received in error, you technically would have nothing to report.  The IRS is the only one that can correct their error.  

If you do not want to contact the IRS, for the description of the correction, you can say refund and interest received in error that was sent back and not cashed.  However, if the IRS says you received it and sent you the 1099-INT, you really should contact them first so they don't end up making a correction to your return saying you did.  It is your records versus their records (since they sent you the 1099-INT) and unless you can show them otherwise or tell them otherwise, then they win. 

[mm1232]

I contacted them. As of now, they said that the record about this mail just appeared (4 months after I sent it) and they sent me a notice asking for more information. All this amount not been credited back yet.
They sent 1099-INT automatically, per my understanding they did it before they processed my mail few months ago.
I was with an IRS agent from the TAX law department for 30 minutes on the phone and we read both publications and he was unable to say am I received interest or not. He said that it should be determined myself.

[mm1232]

>>When the check was in your hand, you had total and complete access to it

Well, just partially like that. It was obvious to me that I do see an amount I'm not entitled to which is just duplicating on what I'm entitled to (payment, which I claimed as a credit).

from pub 538

Constructive receipt.

Income is constructively received when an amount is credited to your account or made available to you without restriction.
received if your control of its receipt is subject to substantial restrictions or limitations.

And it's not only my records against their records anymore. They confirmed receiving the check, so they have mail with stamp on it from USPS saying that it was sent 4 months ago.

[DianeW777]

You do not have to report the interest. Confidently file your return with only the interest you actually received that belongs to you in 2023. 

As you indicated by you at the beginning of the thread, you realized you had received an overpayment and returned it without cashing it. They have confirmed receipt of your correspondence. The IRS is taking extraordinary timeframes to resolve any issue since COVID.  I will repeat the previous answers - you have all the documentation you need should any question arise later.

@mm1232 

[mm1232]

I have 100% the same opinion as all of you guys here. Did call to IRS to find their opinion and talked to 2 IRS agents explaining the case in details. It was the tax law department.
So the first one pointed out Pub 550 "Constructive receipt" definition, consulted with someone putting me on hold, and said to me that I received interest.
Then I found Pub 538, the same term "Constructive receipt" with a bit more detail and a check example there, which is very similar to my case. Did call one more time, and talked to another agent from the same Tax law department, he read both definitions and said that he was "unable to say am I received interest or not and I have to do determinition by myself".

Cool, the IRS doesn't know am I received interest from them or not and doesn't know aspects from their own publications.

As for me - it can't be two different definitions of the same term depending on whether it's interest or income in general, which includes interest as a subtype of income.

So for me - it's not about whether I am right in my understanding or not.

I know that I'm right I didn't receive interest and it's clearly proved by definition, an example from Pub 538, usps receipt, and IRS confirmation of mail receiving. But I'm just thinking of taking extra steps to cover alternative scenarios.
That's why they would be unable to blame me in underreporting income and in the very worst case I would just pay tax and interest on tax - it's like a hundred $ in 3 years.