IRS refund checks are not what we think-Truth!

The Tax Relief Checks Sent to U.S. Taxpayers in 2001 Are Not Really Refunds-Truth!

Summary of eRumor
An article from the Rocky Mountain News in Colorado has gotten wide circulation on the Internet. The writer, David Milstead, warns that the tax "refund" everybody thought they were receiving as a part of a tax reform measure from Congress and President Bush is not a refund. It's actually money from taxes that will be paid for tax year 2001.

The Truth
According to the Internal Revenue Service, this is true.

Here is a step-by-step explanation.

1. Congress passed, and President Bush signed, "The Economic Growth and Tax Relief Reconciliation Act of 2001."

2. Among other things, it lowered taxes on your income after December 31,2000. That means it applies to money you earned beginning in 2001 and does not apply to money you earned in 2000.

3. Ordinarily, you would wait until 2001 is over to compute your taxes and pay them by April 15, 2002. That would mean that if Congress gave you a tax break for your 2001 income, you would expect to benefit from it at that time.

4. The law passed by Congress, however, gives us an "advance payment" on our 2001 taxes even before the year is over and long before the time that we would normally be computing and paying those taxes.

5. The problem, however, is that since you are receiving the advance payment for a tax year that is not yet completed, how does the IRS know how much your payment should be? The answer is that the IRS is using your year 2000 tax figures to give them a clue. They are asking, "If the lower tax rate had been in effect at that time, how much less tax would you have had to pay?" That's one of the reasons why not every person is receiving a check. If you didn't pay any taxes for 2000, you don't get an advance check. You may ask, "But that doesn't seem fair because even though I didn't pay any taxes for 2000, I know I will be for 2001, so I should get a break too." You are right and when you compute your taxes for 2001, that can be adjusted.

7. When tax time does come around in April, 2002, you may look at the tax tables and notice that the tax rates don't seem to be lower. That's because the advance payment check represented your tax relief for 2001. You already got it. If Congress gave the advance payment and lowered the tax tables too, that would be a double tax cut.

updated 7/17/12

A real example of the story as it has been circulated:

Subject: WARNING: There's a catch to that tax "refund" check

WARNING: There's a catch to that tax "refund" check....
Rocky Mountain News
July 21, 2001

Tax checks in the mail -- with a catch
Practical reasons behind advance-refund system
By David Milstead, News Staff Writer

The tax-relief checks that will start arriving in mailboxes next week don't have a consumer-warning label, so we're happy to provide one.
Warning: This check is not a "rebate" of taxes you already paid. It's
an advance on the refund you'll get when you file next April.

If it's an advance, you ask, does that mean my refund in April will be
$300 smaller than it would have been? And if I'm unlucky enough to owe taxes, does that mean my tax bill will be $300 higher?

The answer to both questions is yes. But you'd never guess that from
the 1040 you'll fill out next year. It's been designed so that it's nearly
impossible to realize how the 2001 rebate checks affect your tax
preparation in 2002.

"I think people think what they're getting is a refund of taxes they
paid in 2000," said Gary Dudley, the tax partner-in-charge at Deloitte &
Touche's Denver office. "If they think their taxes were going to show up
lower April 15 (from this change), they're not."

The "immediate tax relief," as the Internal Revenue Service calls it,
was designed by Congress and the Bush administration to give taxpayers the benefit of a 2001 tax-rate reduction as soon as possible. Rather than wait for next April, you'll get the tax cut now.

"Congress intended the credit to take care of the rate reduction for
2001," said John McGreevy, an assistant branch chief for administration with the IRS. "They wanted to get money into people's pockets for an economic stimulus."

Bear with us for the math on how your check is calculated: The rate on
the first $6,000 of income for singles and $12,000 for married taxpayers filing jointly is being cut from 15 percent to 10 percent. That's why the refund checks range from $300 for singles ($900 in taxes reduced to $600) and $600 for married ($1,800 in taxes reduced to $1,200).

But if you were to fill out the tax form next April using the new
rates, you'd get the tax-cut benefits a second time. That's why the tax
tables that will accompany next year's 1040 will charge you the old 15
percent tax rate, not the new 10 percent rate.

The IRS could have included a line at the end of the 1040 where you
took the amount of the refund check and reduced your refund by $300 or $600 or, even worse, added that money to the tax bill you owe. You won't have to do that, because the amount owed you pull from the tables at the back of the booklet will have already done that for you.

"The risk of that (line) approach is that the adjustment could flip you
from a refund to a balance due, and you really wouldn't believe you
received that money," Dudley said.

But before you direct your anger at the IRS, look to the folks who
designed -- and are taking credit for -- this advance-refund system:
Congress and George W. Bush.

"It was not left to our discretion," said Marilyn Brookens, an IRS
attorney in Washington. "It was a congressional and presidential decision to do it this way, and we're implementing what we were told to do."

Brookens points to the tax-cutting language in the report from the
House-Senate conference committee that Bush signed into law earlier this year. The law said that in 2001, the advance refund occurs "in lieu of" the rate cut from 15 percent to 10 percent.

That statement, Brookens said, meant "if we didn't do it this way, we
would be in trouble with them."

But there are practical reasons, too, Brookens said: "It's an effort to
have as few people as possible enter a number on the 1040. Every time there's another computation, it increases the likelihood of errors.
"It's the way that will be quickest, most effective and result in the
fewest number of errors," she said.

July 21, 2001
Copyright 2001, Rocky Mountain News. All Rights Reserved.