IRS Refund Check - Estimated Tax Payment

[Hoosier]

IRS sent 2018 1040 refund check to client when the amount should have been retained to cover estimated 2019. Client has not yet cashed the check. Seems like there would be two potential options: 1 - cash the check and immediately write a new estimated tax check back to US Treasury for 2019 estimated tax. Or 2 - send the check back with a letter explaining that the funds should have been retained and to void the refund check. Option 1 seems to make more sense. Option 2 seems like a potential problem. Any thoughts or suggestions?

[Dude]

Assuming estimated amounts were listed I say option one is better. Option 2 could result in no refund and no estimated tax payment as the check "works its way through the system". I mean, we are in the 4th quarter now so time is an issue.

[TaxGuyBill]

Although option 1 would likely be easier, that MIGHT cause a penalty for underpaying estimated taxes. The payment won't be credited until now, rather than April 15th, so it could result in a penalty.

[kathyc2]

You give no indication as to the amount. Using 200 days the penalty will be 2.7% if paid now. If the amount you would charge the client to fix the problem is more than what the potential penalty would be, they wouldn't be coming out ahead, would they?

[ATSMAN]

IRS sent 2018 1040 refund check to client when the amount should have been retained to cover estimated 2019. Client has not yet cashed the check. Seems like there would be two potential options: 1 - cash the check and immediately write a new estimated tax check back to US Treasury for 2019 estimated tax. Or 2 - send the check back with a letter explaining that the funds should have been retained and to void the refund check. Option 1 seems to make more sense. Option 2 seems like a potential problem. Any thoughts or suggestions?

What is listed on line 21 of 1040? If it was the full amount of the refund and taxpayer still received the check, I would suggest making a copy of the check before cashing and then go to directpay and make an estimated tax payment. If any penalty is charged later you may have a basis to file for an abatement based on the IRS screwup.

[Burke]

Had something similar this year. The state return had a net refund of which most was directed to be applied to 2019 estimated. Return was held pending verification of 2018 estimated payments. Turns out they had misapplied one and were saying the TP owed THEM money. Copies of checks which were cashed and identified as estimated tax payments along with correspondence verified that a refund was due. They applied the missing estimated tax payment, BUT sent the original refund to the TP by check rather than processing as originally filed! TP cashed check and sent in the 2019 estimated installment. If the state tries to assess penalty due to this, I will demand abatement due to their error. I don't expect it to be a problem.