We submitted a 2016 W2 as opposed to the 2017 W2 for wages on our 2017 Tax return by accident. The return was electronically accepted by the IRS and after a month of no refund we received a letter from the IRS stating that they are in the process of conducting a thorough review. After receiving the IRS letter, we realized the error that was made (Incorrect W2). We called the Taxpayer Advocate Service (TAS) listed on the letter and they suggested submitting an Amended Return (1040X). When I go into the Turbo Tax 2017 return and attempt to perform an Amended return the refund changed dramatically from $7500 to $869 even though the W2 wage difference from 2016 and 2017 was minimal. Am I missing something here, does the IRS combine the two returns or am I doing something incorrectly within Turbo Tax.
No, this is probably correct.
The issue is this:
The processing of the original return is done separately from the processing of the amended return. Your 2017 refund is being processed (or would be if the IRS hadn't flagged it) and at some point, if they release your return, they will send you your $7,500 refund.
The amount of $869 on your amended return is over and above your refund on the original return. That is, the software determined that if you had filed with the 2017 W-2 originally, your refund would have been $8,369. But since your $7,500 is already coming to you as part of the original filing process, the amendment will send you only the difference.
Go ahead and finish and mail the amended return. If in the meantime, the review team sends you another letter, just reply that at the suggestion of the Taxpayer Advocate Service, you filed an amended return to correct the issue you know about. With luck, that will settle things.
Of course, the review might discover something totally different which might mean that you would have to file a second amended return.