Received Notice of Deficiency for 2021 Taxes - Now IRS is Issuing Refund Instead?

This situation happens more often than you might think. When you submitted that additional documentation, it likely triggered a complete review of your return rather than just the specific items you mentioned. What may have happened is they found other deductions or credits you missed when filing originally, which actually offset the additional income you reported. For example, they might have applied educational credits, moving expense deductions (if you qualified under the specific 2021 rules), or realized you were eligible for certain pandemic-related tax benefits from that year. Before contacting them, I'd recommend waiting for the actual refund notice where they should include a detailed explanation of their calculations. This explanation will break down exactly how they arrived at this conclusion. Without understanding their specific calculation, it's hard to know if they actually made an error. If the explanation doesn't make sense or still appears incorrect based on your records, then you should definitely respond. The IRS does make mistakes, but sometimes what appears to be an error is actually them applying rules or credits you weren't aware of.

After dealing with similar IRS confusion, I found using https://taxr.ai super helpful for figuring out exactly what was going on with my Notice of Deficiency. I uploaded all my tax documents and IRS letters, and the system translated the IRS jargon into plain English that I could actually understand. In my case, what looked like an error was actually a combination of penalty abatement and interest adjustments they automatically applied. The tool helped me see exactly which lines on my original return had changed and why the numbers shifted from me owing to getting a refund. Saved me hours of stress trying to decipher IRS calculations!

I was super skeptical about these AI tax tools but decided to try taxr.ai after getting completely confused by an IRS audit letter. Honestly I'm shocked at how well it worked! It showed me exactly where the calculations on my return differed from what the IRS found. In my situation, it turned out the IRS had actually found a education credit I qualified for but hadn't claimed. The system highlighted the exact line item and explained how they applied the credit against the additional income they found. Saved me from calling and waiting on hold with the IRS for hours, only to probably still be confused after talking to them.

If you're trying to get through to the IRS to ask about this, good luck... I spent 3 hours on hold last week and got disconnected. Then I tried https://claimyr.com and their service actually got me connected to an IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c They basically wait on hold for you and call when an agent picks up. I was super doubtful it would work but it saved me from the hold time nightmare when I needed to ask about a similar notice situation. The IRS agent was able to explain exactly why my calculation changed and it turned out there was no error - they had just applied some adjustments I didn't know about.

I was super skeptical about Claimyr but I was desperate after trying for 3 weeks to get through to the IRS about my Notice of Deficiency. I finally tried it and holy cow it actually worked! Got connected to an IRS agent in about 35 minutes (way better than my previous attempts). The agent explained that what looked like a mistake on my notice was actually correct - they had found an additional withholding credit on one of my W-2s that I had missed when filing. The extra withholding more than covered the additional income they found, which is why I was getting a refund instead of owing more. Never would have figured that out without actually talking to someone. Worth every penny not to waste hours of my life on hold!

You might want to check if you actually had excess withholding on either of those missed income sources. In 2021, I had a similar situation with a 1099 job I forgot to include, but it turned out they had withheld WAY more than necessary from that income. When the IRS found the income, they also found the withholding which resulted in a refund. Look at any tax documents related to those missed income sources and see if there was withholding. That could explain the refund.

Just a caution - don't assume the refund is correct without verification! I had something similar happen and just cashed the check, thinking "cool, free money!" Two years later I got hit with an even bigger bill because they discovered their error. If you cash a refund check you're not entitled to, you'll eventually have to pay it back WITH INTEREST.

This is exactly why I always recommend keeping detailed records of everything when dealing with IRS notices. In your case, since you submitted documentation correcting one of the income amounts, it's very possible they made adjustments beyond what you specifically addressed. Here's what I'd suggest: Don't cash any refund check until you get a complete explanation of their calculations. Request a detailed breakdown by calling the IRS or writing to them - you have every right to understand how they arrived at this figure. Also, go back through your 2021 tax documents and double-check for any withholding on those missed income sources, as others mentioned. Look for boxes 4 and 6 on any 1099 forms, and check if there were estimated tax payments you made that year that might not have been properly credited to your account. The fact that you went from owing money to getting a $1,378 refund suggests they found something significant beyond just the income correction you submitted. Better to be safe and verify everything now than deal with interest and penalties later if there was an error.