Most people assume a bad year means a bigger refund. James Okonkwo believed that, too — until his 2025 tax return proved otherwise in the most clarifying way possible.
When I sat down with James Okonkwo at a coffee shop near the Galleria in Houston in early March 2026, he had a yellow legal pad covered in handwritten numbers. He’d been doing the math again, trying to reconcile the $2,847 the IRS had deposited into his account on February 28th against the $5,200 he’d calculated he was owed. He pushed the pad across the table before I’d even opened my notebook.
James is 41, a petroleum engineer who immigrated from Nigeria at 19 with what he described as “a suitcase, $200, and a plan that made no sense on paper.” He put himself through engineering school, landed a job at a mid-size Houston energy firm, and watched his salary triple over five years. He bought a primary home, then two rental properties. He also sends $800 a month to family in Lagos — a commitment he has never missed, not once, in over a decade.
Then oil prices softened. His employer cut contractor hours in Q2 2025. Two of his rental units sat vacant for a combined four months. His gross W-2 income for 2025 dropped roughly $34,000 compared to 2024. On paper, the tax math looked favorable. In practice, the IRS saw his return differently.
The Year Everything Shifted at Once
James filed his 2025 federal return on January 31, 2026, using a CPA he’s worked with for several years. He had W-2 income from his engineering role, Schedule E income and losses from his two rental properties, and a mortgage interest deduction spread across three properties totaling roughly $1.2 million in outstanding balances.
His CPA calculated a refund of approximately $5,200 based on that combination: lower earned income meant his withholding from the prior year over-collected, and the rental losses were expected to offset a portion of his taxable income. James told me he was counting on that refund to cover a property tax bill due in April.
What James didn’t fully account for — and what his situation highlights about the passive activity loss rules under the U.S. tax code — is that rental losses are not always fully deductible in the year they occur. According to IRS Publication 527, taxpayers whose modified adjusted gross income exceeds $100,000 begin to lose the ability to deduct rental losses against ordinary income, with the deduction phasing out entirely at $150,000 MAGI. Even with his income reduced in 2025, James’s MAGI still landed well above the $100,000 threshold.
Waiting on the IRS: 28 Days of Silence and a CP Notice
After filing on January 31st, James told me he checked the IRS “Where’s My Refund” tool almost daily. The tracker showed his return was received, then moved to “processing” — where it stayed for 28 days without updating. On February 27th, a CP12 notice arrived in his mailbox.
A CP12 notice, according to the IRS’s official notice library, means the IRS found a miscalculation on the return and adjusted the refund amount. It is not an audit and does not require a formal response if the taxpayer agrees with the change. James did not agree — at least not immediately.
“I called the number on the letter the morning it arrived,” James told me. “I was on hold for 54 minutes. When someone finally picked up, they confirmed the adjustment was related to my Schedule E passive loss calculation. My rental loss deduction had been reduced from what my CPA claimed.”
His deposit of $2,847 arrived the following day — February 28th — before he had time to formally dispute anything. He described sitting in his car in the driveway, staring at the bank notification on his phone. His wife was inside. He hadn’t told her the number he was expecting.
The Weight of Three Mortgages and One Wire Transfer a Month
Understanding why this CP12 adjustment stung requires understanding the financial architecture James has built — and the pressure it now carries. He owes approximately $1.2 million across three mortgage balances: his primary residence in a Houston suburb, a two-unit rental property in the Heights neighborhood, and a single-family rental in Katy. The monthly mortgage obligations alone run close to $7,400 combined, he told me.
On top of that, he sends $800 every month to his family in Lagos through a wire transfer service. “That number has never changed,” he said. “My parents are older. My siblings are still building. I don’t miss that payment.” Over twelve months, that’s $9,600 leaving the country — money that draws no U.S. tax deduction and doesn’t reduce his taxable income.
What he described to me is a financial structure built for a higher income level — one that made complete sense when his salary was climbing and properties were occupied. What the IRS adjustment did, more than anything else, was force a number onto a page that confirmed what he had been avoiding: the margin had narrowed considerably.
What the Refund Actually Revealed
James told me he has not disputed the CP12 adjustment. After speaking with his CPA again in early March, he accepted that the IRS’s passive activity loss calculation was technically correct given his income level. The $2,353 difference won’t be refunded.
The $2,847 covered part of the April property tax bill. The remainder came from savings he’d rather not have touched. His wife now knows the full picture — he told her the week after our first conversation. He said that was harder than the IRS call.
As James explained it, the rapid salary growth of his early career created expectations — about lifestyle, about property, about what was sustainable — that the income could support at its peak but not at every point along the curve. The rental properties may eventually recover their value. The passive losses he couldn’t deduct in 2025 don’t disappear; they carry forward and can offset future rental income under IRS passive activity rules, according to IRS Publication 925. That’s a technical fact that offers some comfort but doesn’t fix the immediate cash flow gap.
When I asked James what he would tell someone else in a similar position — multiple properties, variable income, high fixed obligations — he paused for a long time before answering. “I’d tell them to model the bad year before it happens. Not after.”
James left our meeting with the legal pad tucked under his arm. He said his CPA wants to revisit his withholding elections for 2026 to avoid another gap between expectation and deposit. His rental units are both occupied again as of February. Oil prices have stabilized, and his hours were partially restored in January 2026.
The $2,353 the IRS didn’t send him is not the story. The story is what that number required him to finally look at — a financial structure that had been running on optimism and hadn’t yet been tested by a year that didn’t go perfectly. For James Okonkwo, tax season 2026 was that test.
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