N.C. taxpayers might not get refunds

August 16, 2010

Don't panic if you're still waiting for North Carolina tax officials to send you the refund indicated on the 2009 return you filed this year. The state should get you that money shortly.

But if in years past you just happened to overpay your taxes and didn't realize the mistake, it looks like the Tar Heel State might hold onto that extra money.

The Raleigh News & Observer says a change in how the state's Revenue Department decides a tax overpayment has been discovered is to blame.

Previously, a computer would flag returns on which filers had mistakenly paid too much.

Once that overpayment was verified by a tax department employee, the refund was sent to the overly-generous taxpayer.

The computer check, as good automated systems should do, usually flags such excess payments pretty soon after they arrive at the tax office.

But subsequent human confirmation of such overpayment errors apparently is a problem.

According to e-mails obtained by the Raleigh newspaper, any overpayment flagged by a computer is not considered to have been officially discovered until it is later verified by an agency employee. And the state revenue office has no provision for conducting this review quickly.

So, notes the newspaper, the North Carolina Revenue Department can hold onto overpayments until it doesn't have to pay them back.

Time is tax money: How long is that? North Carolina law gives taxpayers up to three years to claim a refund from a filed return. That's the same time limit used by the IRS.

But, as the News & Observer article points out, taxpayers who overpay their taxes are in a difficult position. If they don't know they've overpaid their state tax bill, how can they request a refund?

Not hard to overpay: You might be wondering how can anyone accidentally overpay the tax collector? It's relatively easy.

Some taxpayers, one Raleigh tax attorney told the paper, write the wrong account number on a check to the Revenue Department.

Other filers forget having made estimated tax payments earlier in the year. Or they forgot about having a prior-year refund applied to the current year's tax bill.

Hope for overpaying taxpayers: Since 1994, around 230,000 North Carolina tax returns have been flagged by computer for a variety of reasons.

Want
to bet that the returns in that total that were tagged for underpayment of
taxes got prompt human attention and faced subsequent collection actions?

As you might expect, state officials who must answer directly to the electorate are not very happy with the Revenue Department's new no-refund policy.

The tax collector loophole was part of 2007 legislation that primarily dealt with how tax disputes would be handled. Now at least one of North Carolina state legislator thinks the overpayment issue needs to be specifically addressed.

State Sen. Dan Clodfelter (D-Charlotte) told the News & Observer that the law change was not meant to give the Revenue Department a means to capture taxes that were overpaid.

"If there's a glitch in the statutory language, I know how to fix it, and we will fix it," said Clodfelter, a Finance Committee co-chair. "And we will do it retroactively. We're not going to let this kind of thing catch people."

In addition to the Raleigh News & Observer article breaking the tax overpayment/refund problem, you can read more in the Myrtle Beach, S.C., Sun News and the Winston-Salem, N.C., Journal (via the Associated Press).

Tax payment, overpayment and refund lessons: For those of us who don't live in the fine state of North Carolina, the situation there still offers some good general tax lessons.

Be sure to carefully check your return before you send it in.

Evaluate how much withholding you're having taken from your paycheck so that you can have use of your money throughout the year and not have to wait for a refund to arrive.

If you are expecting a refund, check the IRS and state online search engines to make sure it's being processed in a timely manner.

And set up a tax recordkeeping system. It can can help you know just what you do, or don't, owe any tax collector, be it at the state level or Uncle Sam.

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