IRS Letter Holding Refund for Review
The purpose of IRS Notice CP07 is to let taxpayers know that their tax refund is being held until the IRS can complete a more thorough review of the benefits claimed under a treaty and/or deductions claimed on the taxpayer’s Schedule A. This usually happens after the IRS has received your tax return for that year. If you have received this notice, and the IRS finds no issues with your return, you should receive your refund within 6-12 weeks, as long as you do not owe other taxes or have any other delinquent debts.
If you itemized deductions (filed Schedule A for things like mortgage interest, property taxes, charity, etc.), you’ll get this notice if the IRS wants to review these items more closely. If you are a non-resident claiming tax treaty benefits, you may also get this notice if your treaty benefits are being reviewed. It is important you hold onto this notice and be prepared to submit documentation if necessary.
Taxpayers don’t need to do anything after receiving the letter CP07. The IRS doesn’t require you to respond to the letter. They just want to make sure that you know they are working on your tax return and they will get back to you in no time. Also, after submitting your tax return for that year to the IRS, don’t file a duplicate return. It will only slow down the review process. Just let the IRS perform their job and they will get back to you when they have completed the review on your return.
The IRS also advises taxpayers to file the IRS Form 8822 if they have changed location or planning to since the time they filed their tax return. After moving to a new location, you will need to use the IRS Form 8822 to notify the Internal Revenue Service (IRS) of your change of address. The IRS may send you notices, refunds paid with a paper check and other correspondence relating to your personal, gift and estate taxes. If you don’t let the IRS know that you have changed location, it sends all correspondence to your last known address, the one listed on your most recent tax return. If after the IRS has completed their review on your tax return and the results show that there is no issue, they will send you your refund within 6-12 weeks, as long as you don’t owe other taxes or debts they are required to collect.
If they find a problem after completing the review, you will receive another notice from the IRS requesting additional information and instructions within 6-12 weeks. Make sure all of your tax information is kept in a safe place so you can make it available when the IRS needs to see it.
The fact that your own tax return was selected for review doesn’t mean that you were targeted by the IRS. Tax returns claiming treaty benefits and/or claimed deductions on Schedule A are randomly selected for review every year.
BASIC UNDERSTANDING OF THE SCHEDULE A IRS FROM
As we have seen, the main purpose of the letter is to let taxpayers know that the IRS is conducting a more thorough review of the deductions claimed on the taxpayer’s Schedule A. Here, we will see what schedule A means and the deductions available for the current tax year (2019/2020).
The Internal Revenue Service (IRS) offers every taxpayer the option to itemize their deductions or to claim the standard deduction. The standard deduction amount varies depending on your filing status. However, if you have significant deductible expenses during the year, the total of which is greater than your standard deduction, you can itemize by reporting the expenses on the IRS Schedule A.
The main purpose of Schedule A is for you to itemize your deductions. Any year you choose to itemize, the schedule A is a required form to fill out. Previously, the schedule A had seven categories of expenses. They were:
- Medical and dental expenses
- Taxes
- Interest
- Gifts to charity
- Casualty and theft losses
- Job expenses and
- Certain miscellaneous expenses.
Since the beginning of year 2018, the IRS said that miscellaneous expenses are no longer deductible so currently, there are six categories of expenses you can deduct on Schedule A. Each of these categories has different requirements and limitations on the amount you can deduct.
When you prepare the Schedule A, you do not have to complete every line or include expenses in each category; just those that you are eligible to claim. Although many taxpayers have deductions for each category, having just one deductible expense may be sufficient to justify itemizing. For example, the mortgage interest deduction alone can be quite significant and by itself, be greater than the standard deduction. When you are done filling out the schedule and applying the specific limitations, you then transfer your total deduction to the IRS Form 1040.
Comparison to the standard deduction – Using Schedule A to itemize your deductions allows you to claim a number of personal expenses; however, it may not make financial sense to do so since you give up the standard deduction. For 2019 tax year, the standard deduction for a single taxpayer is $12,200. If you have $1,000 in charitable donations and pay $2,000 of mortgage interest during the year, your itemized deductions are only $3,000. In this case, you can save more in income taxes by claiming the standard deduction instead of itemizing.
Keeping accurate and detailed financial records of your expenses during the year can reduce the amount of time you spend preparing the Schedule A and may also be helpful when evaluating the deductibility of each expense. Some itemized deductions, such as property and sales taxes, are often overlooked. For example, not only can you deduct property taxes on your home, but also on the boats and mobile homes you own.
In addition, you can deduct either state income tax or state sales tax that you pay, but not both. For purposes of calculating your sales tax deduction, retaining receipts for all purchases you make during the year is imperative to maximizing your tax savings although or you can claim the amount from the IRS sales tax tables instead.
