Ask the Lawyer received the following question (paraphrased for easier reading and clarity) from a reader on a legal matter that might be of interest to the entire audience.
A few years ago OPM erroneously disbursed a refund to me for retirement contributions in the 1980s when I transferred from CSRS to FERS. After an audit, I set up a payment plan via withholding from my FERS retirement annuity. From the forms I received, it appears almost 75 percent of the payback funds are repaying interest from the “taxable amount” portion of my annuity. I believe that the interest portion should not be subject to income taxes and should not be included in the “taxable amount” box on the form. Is this accurate? Can you return untaxed funds with untaxed money?
I do not know how or why you did not pay tax on the interest. Based on my understanding of the Internal Revenue Code, you should have. I recommend that you consult a tax professional for the more specific answer you are seeking. If you choose not to consult an attorney, be careful of what you tell the IRS. You could end up with a big penalty and interest payments for not earlier paying tax on the interest.
Bill Bransford is managing partner of Shaw, Bransford & Roth, PC.
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