IRS Issues Erroneous CP35E Notices to Millions of Taxpayers: What Milton Law Group Clients Need to Know

In late April and early May 2026, the IRS mistakenly issued millions of CP35E notices stating: “We couldn’t direct deposit your 2025 Form 1040 refund.” These notices were sent even to taxpayers who were not owed a refund – including many who had a balance due on their 2025 return.

This widespread error has caused understandable confusion, especially because the CP35E notice is normally associated with the IRS’s new direct-deposit verification process tied to the federal shift away from paper refund checks.

What Is a CP35E Notice?

The CP35E notice is part of the IRS’s updated refund-processing system. It is typically issued when the IRS cannot complete a direct deposit because:

• No bank account information was provided
• The bank rejected the deposit
• The account could not be validated

Under normal circumstances, the notice instructs taxpayers to update their bank information through their IRS Online Account within 30 days.

Why Were These Notices Sent in Error?

According to tax-industry reports, the IRS’s automated systems may have been incorrectly programmed to issue CP35E notices even when:

• The taxpayer did not request a refund, or
• The taxpayer owed a balance and had no refund due at all

Informal reports from IRS service centers indicate that this programming error caused the system to generate CP35E notices for taxpayers who had no refund to direct deposit in the first place.

This aligns with what many taxpayers experienced: receiving a notice claiming the IRS “couldn’t direct deposit your refund” when no refund existed.

What Should Taxpayers Do?

Milton Law Group recommends the following proactive steps if you receive this notice:

1. Do not provide bank information unless you were actually owed a refund.
   If you had a balance due or no refund expected, the notice is almost certainly erroneous.
2. Verify your 2025 filing status.
   Check your filed Form 1040 to confirm whether you requested a refund or owed tax.
3. Ignore the notice if you were not due a refund.
   Tax professionals and IRS guidance indicate that taxpayers who were not expecting a refund can safely disregard the erroneous CP35E.
4. Watch for scams.
   Because CP35E notices involve bank information, scammers are actively circulating fake versions. Red flags include QR codes, requests to respond by email, text, or phone, non-IRS websites, and threatening or urgent language. A legitimate IRS notice will only arrive by U.S. mail.

What This Means for Milton Law Group Clients

This IRS error is widespread, and receiving a CP35E notice does not mean you made a mistake on your return. It also does not mean you owe additional tax or that your payment failed.

If you were not expecting a refund, the notice is simply the result of a system-generated error and requires no action.

If you did expect a refund and received a CP35E, the notice may be legitimate – contact our office, and we can help you determine whether action is required to secure your funds.