CP138 Notice: What It Means and How to Respond
Summary:
CP138 is an IRS notice informing taxpayers that all or part of their overpayment or refund has been applied to other federal taxes they owe. This notice often comes as a surprise and can confuse taxpayers expecting a refund. Understanding why the reallocation happened and knowing how to respond is key to resolving the issue and avoiding complications.
Receiving an IRS notice can be concerning, especially when it involves money you expected as a refund. The CP138 notice tells you that the IRS has used your overpayment or refund to cover other federal taxes you owe. This happens when there are unpaid debts from previous years, and instead of receiving your refund, it’s applied to settle those taxes.
Struggling with IRS notices? If you’ve received an IRS letter and aren’t sure how to handle it, you might want to explore professional tax relief options. Optima Tax Relief has helped thousands of people resolve their tax issues and get back on track with the IRS. Learn more about how they can assist you with your situation.
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What is a CP138 notice?
A CP138 notice is a formal letter from the IRS, informing you that your refund or overpayment has been used to settle a different federal tax debt. Instead of getting a refund, the IRS redirected those funds to cover unpaid taxes from prior years or other federal obligations.
This happens for various reasons, including unpaid income taxes, self-employment taxes, or past employment taxes. The IRS reallocates your overpayment to cover these debts when they detect an outstanding balance. The notice includes details on how much was applied and which tax periods or debts it was used for.
CP138 notices are usually issued after the IRS processes your tax return and identifies an overpayment. Instead of sending the refund you expected, they apply it to unpaid taxes. The IRS does not need to notify you before reallocating the funds.
Why did you receive a CP138 notice?
Receiving a CP138 notice can be disappointing, especially when you anticipated a refund. However, there are common reasons why the IRS may apply your overpayment to another tax obligation:
Outstanding federal taxes
If you have unpaid federal taxes from previous years, the IRS will apply your refund or overpayment to cover those debts. This is the most frequent cause of a CP138 notice.
If you have unpaid federal taxes from previous years, the IRS will apply your refund or overpayment to cover those debts. This is the most frequent cause of a CP138 notice.
Unresolved tax disputes
If you have an ongoing dispute or audit with the IRS over past tax years, they may withhold your refund to offset potential liabilities from those disputes.
If you have an ongoing dispute or audit with the IRS over past tax years, they may withhold your refund to offset potential liabilities from those disputes.
Errors in prior filings
The IRS might find errors in your past tax filings, leading to underpayment. In such cases, they can use your current refund to settle those discrepancies.
The IRS might find errors in your past tax filings, leading to underpayment. In such cases, they can use your current refund to settle those discrepancies.
Cross-year payments
Sometimes, if you owe taxes for multiple years, the IRS may use your refund from one year to cover taxes due for another year. This happens if you have entered into a payment plan or the IRS has already notified you about the unpaid taxes.
Sometimes, if you owe taxes for multiple years, the IRS may use your refund from one year to cover taxes due for another year. This happens if you have entered into a payment plan or the IRS has already notified you about the unpaid taxes.
Understanding why you received a CP138 notice is essential for determining your next steps. The notice outlines the tax periods or debts your refund covered and how much of your refund was used.
Pro Tip
Always review your tax records before filing to catch any discrepancies that could trigger a CP138 notice or other IRS actions. Staying proactive helps avoid surprises.
How does the CP138 notice affect you?
The CP138 notice directly impacts you by reducing or eliminating your refund. Instead of receiving the expected amount, the IRS uses it to cover unpaid taxes. This can create financial stress, especially if you rely on the refund for paying bills, investments, or other expenses.
Here are some ways a CP138 notice might affect you:
Loss of expected refund
You won’t receive the refund you were expecting. Instead, the IRS used it to cover your unpaid taxes.
You won’t receive the refund you were expecting. Instead, the IRS used it to cover your unpaid taxes.
Potential penalties and interest
If your overpayment went toward prior tax debts, and those debts included penalties or interest, you may still owe additional amounts after the reallocation. Penalties or interest might continue to accrue if the debt wasn’t fully covered.
If your overpayment went toward prior tax debts, and those debts included penalties or interest, you may still owe additional amounts after the reallocation. Penalties or interest might continue to accrue if the debt wasn’t fully covered.
Future refunds at risk
If you don’t resolve your outstanding tax liabilities, the IRS may apply future refunds to cover those debts too. This could become a recurring problem if you leave those obligations unaddressed.
If you don’t resolve your outstanding tax liabilities, the IRS may apply future refunds to cover those debts too. This could become a recurring problem if you leave those obligations unaddressed.
Tax account confusion
A CP138 notice can confuse your overall tax situation, especially if you were unaware of any outstanding debts. Make sure to check your IRS account to stay updated on any liabilities.
A CP138 notice can confuse your overall tax situation, especially if you were unaware of any outstanding debts. Make sure to check your IRS account to stay updated on any liabilities.
Pro Tip
If you’re entering into a payment plan with the IRS, monitor your account regularly to ensure that all payments are processed correctly, reducing the risk of refund reallocations.
What should you do when you receive a CP138 notice?
When you get a CP138 notice, it’s crucial to act promptly to resolve the issue and avoid further problems. Follow these steps:
- Review the notice carefully: The CP138 notice will include details about how much of your overpayment was applied and to which tax periods or debts. Make sure you understand this information.
- Verify your tax records: Compare the notice with your own tax records. Ensure that the IRS’s information about your past debts is accurate.
- Check your IRS account: Access your tax account online through the IRS portal to confirm any outstanding federal tax liabilities. This will clarify if your refund was correctly applied.
- Contact the IRS if needed: If you think there’s been a mistake, or if you don’t understand why your refund was applied to another debt, reach out to the IRS. The notice should include contact details.
- Settle any remaining debts: If the notice shows that your refund only partially covered your debt, take steps to pay off the remaining balance to avoid penalties and interest.
Responding quickly is essential to avoid further issues and to resolve your tax obligations promptly.
Pro Tip
Consult a tax professional if you have multiple years of unpaid taxes to avoid ongoing refund reallocations. They can help you develop a strategy to resolve your tax debts efficiently.
How to prevent future CP138 notices
Receiving a CP138 notice can be frustrating, especially when you expect a refund. Here are steps you can take to prevent this from happening again:
- Pay your taxes in full each year: Ensure that you pay your taxes in full every year. If you’re unsure how much you owe, use tax software or consult a tax professional.
- Resolve tax disputes promptly: If you have an ongoing tax dispute with the IRS, resolve it as quickly as possible. Unresolved disputes can lead to the IRS reallocating your refund to cover potential liabilities.
- Set up a payment plan if necessary: If you can’t pay your taxes in full, consider setting up a payment plan with the IRS. This allows you to pay off your debt over time and reduces the risk of future refund reallocations.
- Check your IRS account regularly: You can monitor your tax account through the IRS website. Staying informed about your outstanding tax debts helps you avoid surprise notices.
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Frequently asked questions
What should I do if I disagree with the IRS applying my refund to other debts?
If you disagree with the IRS’s decision to apply your refund to another debt, contact the IRS directly to dispute the action. Have your CP138 notice and any supporting documentation, such as proof of payments or details regarding the debt. You may also consider seeking help from a tax professional or the IRS Taxpayer Advocate Service.
Can the IRS apply my refund to state or local taxes?
No, a CP138 notice only applies to federal tax liabilities. If you owe state or local taxes, those authorities may have different processes for claiming unpaid debts. In that case, you would receive a separate notice from the state or local tax agency.
Will I be notified before the IRS reallocates my refund?
No, the IRS does not notify taxpayers in advance if they plan to apply a refund to other federal tax debts. The CP138 notice is sent after the IRS has already applied the refund to your outstanding tax liabilities.
Can I still get a refund if part of my overpayment was applied to other taxes?
Yes, if your overpayment exceeds the debt, the IRS will issue the remaining portion as a refund. The CP138 notice will specify how much of your overpayment was applied and whether any refund remains.
How can I check if I have other outstanding federal debts?
You can check for any outstanding federal tax liabilities by accessing your IRS tax account online. The IRS portal allows you to view your current balance, payments, and any unpaid taxes. Monitoring your account can help you avoid future refund reallocations.
Need help understanding other IRS letters and notices? Visit our comprehensive guide to IRS Letters and Notices or search for the document you received in the table below.
| CP01 | The IRS verified your claim of identity theft and will monitor your account. |
| CP01H | The IRS received a tax return with a social security number that belongs to a dead person. |
| CP02H | Money is due on an amended return based on a grant received due to Hurricane Katrina, Rita, or Wilma. |
| CP03C | You received the First-Time Homebuyer Credit for a house you purchased. |
| CP04 | You may be eligible for tax deferment because either you or a spouse served in a combat zone, a qualified contingency operation, or a hazardous duty station during the tax year specified on your notice. |
| CP08 | You may be entitled to additional money due to the Additional Child Tax Credit. |
| CP10 | Your tax return changed due to a miscalculation, and the refund you wanted to apply to an estimated tax payment has changed. |
| CP10A | Your tax return changed due to a miscalculation of the Earned Income Credit, and the refund you wanted to apply to an estimated tax payment has changed. |
| CP11 | You owe money because the IRS amended your return due to a miscalculation. |
| CP11A | Your tax return changed due to a miscalculation of the Earned Income Credit, and the refund you wanted to apply to an estimated tax payment also changed. |
| CP11M | Your tax return changed due to a miscalculation of the Making Work Pay and Government Retiree Credit, and the refund you wanted to apply to an estimated tax payment has changed. |
| CP12 | You are due a bigger refund because the IRS corrected one or more mistakes on your tax return. |
| CP12A | The IRS made changes to correct the Earned Income Credit (EIC) claimed on your tax return. |
| CP12E or CP12F | The IRS corrected a miscalculation on your return. |
| CP12M | The IRS made changes to the computation of the Making Work Pay and/or Government Retiree Credits on your return. |
| CP12R | The IRS made changes to the computation of the Rebate Recovery Credit on your return. |
| CP13 | The IRS made changes to your return due to a miscalculation. There is no refund or amount due. Your balance is zero. |
| CP13A | The IRS made changes to your return due to a miscalculation of the Earned Income Credit. There is no refund or amount due. Your balance is zero. |
| CP13M | The IRS made changes to your return due to a miscalculation of the Making Work Pay credit or the Government Retiree Credit. There is no refund or amount due. Your balance is zero. |
| CP13R | The IRS made changes to your return due to a miscalculation of the Recovery Rebate Credit. There is no refund or amount due. Your balance is zero. |
| CP14 | You owe money on unpaid taxes. |
| CP16 | The IRS made changes to your return due to a miscalculation. The refund you were due was applied to other tax debts. |
| CP21A | You owe money due to the changes you requested that the IRS make on your tax returns. |
| CP21B | You are due a refund due to the changes you requested that the IRS make on your tax returns. The money should arrive within 2 to 3 weeks. |
| CP21C | The IRS made the requested changes to your tax return. You will not receive a refund, and there is no tax due. Your balance is zero. |
| CP21E | As a result of your recent audit, the IRS made changes to your tax return, and you owe money as a result of those changes. |
| CP21I | The IRS made changes to your tax return relating to the Individual Retirement Arrangement (IRA) taxes. You owe money due to the changes. |
| CP22A | The IRS made the changes you requested, and you owe money as a result. |
| CP22E | As a result of your recent audit, the IRS changed your tax return, and you now owe money. |
| CP22I | The IRS made changes to your tax return relating to the Individual Retirement Arrangement (IRA) taxes. You owe money due to the changes. |
| CP23 | The IRS changed your return because there was a difference between the amount of estimated tax payments listed on your tax return and the amount actually posted to your account. You owe taxes due to these changes. |
| CP24 | The IRS changed your return because there was a difference between the amount of estimated tax payments listed on your tax return and the amount actually posted to your account. This resulted in an overpayment of estimated taxes. |
| CP24E | The IRS changed your return because there was a difference between the amount of estimated tax payments listed on your tax return and the amount actually posted to your account. This resulted in an overpayment of estimated taxes. |
| CP25 | The IRS changed your return because there was a difference between the amount of estimated tax payments listed on your tax return and the amount actually posted to your account. You are not due a refund, nor do you owe any money. Your balance is zero. |
| CP31 | You need to update your address because your refund check was returned to the IRS. |
| CP45 | The IRS was unable to apply your overpayment to your estimated tax as you requested. |
| CP49 | The IRS used all or part of your refund to pay a tax debt. |
| CP53 | Your refund check will be sent by mail because the IRS can’t provide your refund through direct deposit. |
| CP57 | The bank declined your payment, so the IRS was unable to draft funds from your bank account. |
| CP71 | A reminder of the amount you owe in tax, penalty, and interest. |
| CP71A | A reminder of the amount you owe in tax, penalty, and interest. |
| CP71C | A reminder of the amount you owe in tax, penalty, and interest. |
| CP71D | A reminder of the amount you owe in tax, penalty, and interest. |
| CP88 | The IRS is holding your refund because you haven't filed one or more tax returns, and it believes you will owe tax. |
| CP90 | The IRS is notifying you of its intent to levy certain assets for unpaid taxes. You have the right to dispute the levy in a Collection Due Process hearing. |
| CP91 | The IRS will levy up to 15% of your social security benefits for unpaid taxes. |
| CP120 | The IRS needs documentation of your tax-exempt status. |
| CP120A | Your organization’s tax-exempt status has been revoked because it failed to file a Form 990 series return for three consecutive years. |
| CP130 | You may no longer need to pay the Alternative Minimum Tax (AMT) because your tax return filing requirements changed. |
| CP152 | The IRS received your return. |
| CP153 | The IRS will send your refund by mail because your direct deposit did not go through. |
| CP161 | You have an unpaid balance due to the IRS. |
| CP166 | Your monthly payment to the IRS did not go through due to insufficient funds in your bank account. |
| CP178 | You may no longer owe excise tax because your tax return filing requirements changed. |
| CP231 | You need to update your address because your refund was returned to the IRS. |
| CP259 | You did not file the business tax return identified in the notice. |
| CP259A | You should have filed these forms but did not – Form 990/990-EZ, Return of Organization Exempt From Income Tax, or Form 990-N (e-Postcard). |
| CP259B | The IRS requires you to file these forms but did not – Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation. |
| CP259C | The IRS believes that you are a private foundation, but did not file the required Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation. |
| CP259D | You must file this form, but you did not – Form 990-T, Exempt Organization Business Income Tax Return. |
| CP259E | You should have filed this form, but you did not – Form 990-N (e-Postcard) or Form 990/990-EZ, Return of Organization Exempt From Income Tax. |
| CP259F | The IRS requires you to file this form but did not – Form 5227, Split-Interest Trust Information Return. |
| CP259G | The IRS requires you to file this form, but you didn’t – Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations. |
| CP259H | As a tax-exempt political organization, you must file this form, but you did not – Form 990/990-EZ, Return of Organization Exempt From Income Tax. |
| CP276A | You submitted your tax liability schedule incorrectly. The IRS typically charges a Federal Tax Deposit (FTD) penalty for this but did not this time. |
| CP276B | The IRS did not receive the correct amount of tax deposits. It normally charges a Federal Tax Deposit (FTD) penalty but did not this time. |
| CP297 | The IRS is notifying you of its intent to levy certain assets for unpaid taxes. You have the right to dispute the levy at a Collection Due Process hearing. |
| CP297A | The IRS has levied your assets for unpaid taxes. You have the right to dispute the levy at a Collection Due Process hearing. |
| CP298 | The IRS notifying you of its intent to levy up to 15% of your social security benefits for unpaid taxes. |
| CP501 | You have a balance due on one of your tax accounts. |
| CP503 | You have an unpaid balance on one of your accounts, and the IRS has not heard from you. |
| CP504 | You have an unpaid amount due on your account. If you do not pay immediately, the IRS will levy your state income tax refund to apply it to the amount you owe. |
| CP504B | You have an unpaid amount due on your account. If you do not pay immediately, the IRS will levy certain property or rights to property to apply it to the amount you owe. |
| CP521 | A reminder that you have an installment agreement payment due. |
| CP523 | You have defaulted on your payment agreement. Therefore the IRS is terminating the agreement and will levy your assets. |
| CP601 | Usted tiene un saldo pendiente de pago (dinero que le debe al IRS) en una de sus cuentas contributivas. |
| CP603 | No hemos recibido respuesta de parte de usted y todavía tiene un saldo sin pagar en una de sus cuentas contributivas. |
| CP604 | Usted tiene un saldo sin pagar en su cuenta. De no pagar esta cantidad inmediatemente, el IRS embargará cualquier reembolso de impuestos estatales al que tenga derecho y aplicarlo al pago de su deuda. |
| CP604B | Usted tiene un saldo sin pagar en su cuenta. De no pagar esta cantidad inmediatemente, el IRS embargará ciertas propiedades o derechos de propiedad y lo aplicará al pago de su deuda. |
| CP621 | Este aviso es para notificarle que usted tiene un plan de pagos a plazos vencido. Por favor, envíe el pago inmediatamente. |
| CP623 | Este aviso es para informarle nuestra intención de cancelar su plan de pagos a plazos y confiscar (embargar) sus bienes. Usted incumplió en su acuerdo. |
| CP711 | Nosotros realizamos cambios a su planilla debido a que entendemos que hubo un cálculo erróneo. Como resultado de estos cambios, usted adeuda dinero por sus contribuciones. |
| CP721 | Hicimos el(los) cambio(s) que usted solicitó a su declaración de impuestos para el año tributario que aparece en su aviso. Como resultado de éste(estos) cambio(s) usted debe dinero en sus impuestos. |
| CP722 | Hicimos el(los) cambio(s) que usted solicitó a su declaración de impuestos para el año tributario que aparece en su aviso. Como resultado de éste(estos) cambio(s) usted debe dinero en sus impuestos. |
| CP771 | Usted recibió este aviso para recordarle sobre la cantidad que adeuda en contribuciones, multas e intereses. |
| CP772 | Usted recibió este aviso para recordarle sobre la cantidad que adeuda en contribuciones, multas e intereses. |
| CP773 | Usted recibió este aviso para recordarle sobre la cantidad que adeuda en contribuciones, multas e intereses. |
| CP774 | Usted recibió este aviso para recordarle sobre la cantidad que adeuda en contribuciones, multas e intereses. |
| CP959 | Usted no radicó su planilla de contribución de negocios identificada en este aviso. |
| CP2000 | The income or payment information on file doesn’t match your tax return. The discrepancy may result in an increase or decrease in your tax due. |
| CP3219A | The IRS has received information that is different from what you reported on your tax return. This may result in an increase or decrease in your tax. |
| CP3219N | The IRS didn’t receive your tax return, so it calculated your return based on the information received from employers, financial institutions, and others. If you want to challenge the proposed tax, you have 90 days from the date of this notice. If you are outside the country, you have 150 days. |
| Letter 0012C | The IRS needs additional information to process your tax return. |
| Letter 0484C | The IRS wants a completed |
| Letter 0525 | Updates you on proposed changes after an IRS examination. Any changes are explained and details the refund due or taxes owed. |
| Letter 531 | IRS Notice of Deficiency. The information the IRS received about you was different from what you reported on your return. |
| Letter 0668D(LP 68) | The IRS released their levy. |
| Letter 0549C | Your tax bill was paid. |
| Letter 0681C | The IRS accepted your payment proposal. However, this is not a formal Installment Agreement. |
| Letter 0757C | You did not adhere to the terms of your Installment Agreement. |
| Letter LT 11 | The IRS plans to seize your property or rights to property. |
| Letter 1058 | The IRS has not received your payment. It plans to seize your property or rights to property. |
| Letter 1615 (LT 18) | You must respond to the IRS within 10 days of this notice regarding past due tax returns. |
| Letter 1737 (LT 27) | Complete and sign Form 433F, Collection Information Statement. |
| Letter 1961C | Your application for a Direct Debit Installment Agreement was declined. It explains why and what you need to do to qualify. |
| Letter 1962C | Your application for a |
| Letter 2050 (LT 16) | The IRS is trying to collect unpaid taxes from you from returns that have been filed or from returns that have not been filed. |
| Letter 2257C | The IRS is providing the payoff amount that you requested. |
| Letter 226-J | An IRS letter to large employers notifying them that they may be liable for an Employer Shared Responsibility Payment (ESRP). |
| Letter 2271C | A request for an Installment Agreement has been approved. It explains the fees and how to qualify for a Low Income Fee Reduction. The letter may also request missing information. |
| Letter 2272C | An IRS letter explaining why your request to pay the balance due in installments was declined. |
| Letter 2273C | A confirmation letter of your request to pay the balance due in installments. It contained the amount to pay, fees charged, and where to send payment. Instructions on how to apply for the Low Income Fee Reduction included. |
| Letter 2318C | A response to a request to pay taxes due to payroll deductions. It also explains the fees that are charged. |
| Letter 2357C | The IRS is admitting that it did not send you the balance due notices that it should have. |
| Letter 2603C | The IRS accepted your installment agreement. The IRS will file a Notice of Federal Tax Lien on your personal property. |
| Letter 2604C | The IRS has accepted your request for installment payments. This IRS letter provides the monthly payment, the address where to send it, and the fees charged. The letter also provides instructions on how to apply for the Low Income Fee Reduction. |
| Letter 2761C | The IRS is requesting your combat zone service dates to ensure that it provides you with the special provisions and protection of the combat zone deferment. Copies of military orders or other documentation to support your time served may be requested. Civilians working in support of the Armed Forces may be required to provide a Letter of Authorization or a letter from their employer. |
| Letter 2789C | An annual reminder notice, as required by law, of the balance due to the IRS. It explains that penalties and interest continue to accrue until the balance is fully paid. |
| Letter 2840C | Confirms your Installment Agreement request and includes the payment amount and due date. This IRS letter explains the fees charged for paying monthly and explains how to apply for the Low Income Fee Reduction (if you qualify). |
| Letter 3030C | Provides an explanation of the tax, penalty, and interest still due on your account. |
| Letter 3127C | A confirmation of your request to make a change to your Installment Agreement. This IRS letter explains the fees for the change. Changes can be to the payment amount or due date, or it can include additional liabilities. |
| Letter 3174 | A reminder of taxes due after the IRS has sent a Notice of Intent to Levy. |
| Letter 3217C | The IRS has accepted your request to pay the balance in installments. This IRS letter provides your payment amount, the due date, and fees charged. The letter also provides instructions on applying for the Low Income Fee Reduction (if you qualify). |
| Letter 3228 (LT 39) | A request to pay the balance due within 10 days using the envelope provided. |
| Letter 3500 | The IRS has received your documents, and it needs additional time to review them. |
| Letter 3572 | Your Federal Income Tax Return has been selected for examination. The IRS auditor requests that you call to schedule an audit appointment. |
| Letter 4883C | The IRS received your federal income tax return but needs more information to verify your identity in order to process your tax return accurately. |
| Letter 4903 (LT 26) | You must file your tax returns immediately. The IRS has previously contacted you, but it did not receive a response. |
| Letter LP 47 | The IRS is trying to locate the person identified in the letter and is requesting that you provide their new address. |
| Letter LP 59 | The IRS has not received a response to the notice of levy it previously sent. |
| Audit Letter 2205 | The IRS manages audits either by mail or through an in-person interview to review your records. The interview may be at an IRS office (office audit) or the taxpayer’s home, place of business, or accountant’s office (field audit). |
| Letter 915 | You recently underwent an audit, and the IRS informs you that you now owe taxes. |
Key takeaways
- The CP138 notice informs you that the IRS has applied your refund to other federal taxes you owe.
- Check the notice carefully to understand which tax periods or debts the refund was applied to.
- To avoid future CP138 notices, ensure that your taxes are paid in full and resolve any disputes with the IRS promptly.
- Contact the IRS if you believe there was a mistake in applying your refund, and be prepared to provide supporting documentation.
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