Tax Refund Delay in 2017
Another Tax Refund Delay Coming for Low Income Taxpayers
The infamous PATH Act of 2015, known as Protecting Americans from Tax Hikes, contains a provision that will delay a tax refund for certain taxpayers. This provision is effective with 2016 returns filed in 2017, and includes those returns that claim either the EITC (earned income tax credit) or the additional child tax credit.
The new law states that no tax refund will be issued that contains a claim for either of these refundable tax credits, before February 15, 2017, and forward, and thus another tax refund delay.
The earned income credit was designed to help low income individuals, but has been an area of severe abuse for several years. Many fraudulent returns are being filed early in the tax season claiming a tax refund, usually with a fake W-2 and claiming tax credits.
Under the “old system”, issuers of W-2 forms didn’t send in the SSA copy of the W-2 until the last day of February. Because of that, there was no way to verify the W-2 on the early filed fraudulent return, and the IRS has been issuing billions of dollars in tax refunds blindly.
Beginning in January 2017, issuers of W-2 forms are required to send in the SSA copy of the W-2 by January 31. It is hoped that the extra two weeks will give the IRS sufficient time to review and match the W-2’s, thereby reducing fraudulent tax refunds substantially.
Unfortunately this means that many low income taxpayers claiming either of those two tax credits will have a tax refund delay for two weeks.
Congress estimates that the reduction in fraud will increase gross revenue by $779 million over the next ten years. That’s about $78 million a year, and a lot of money, but I suspect only the tip of a very large iceberg.
This emphasis is being made in an attempt to create a balance in being able to issue fast tax refunds and at the same time, reducing the number of fraudulent tax returns.
Many low income individuals and families rely on their tax refund to reduce debt and to cover other living expenses. For that reason, they generally file their tax return as soon as tax season opens during the third week in January.
The director of tax operations at the Baltimore CASH Campaign, said that many individuals rush to their site in late January and early February to get their tax refund as quickly as possible. He added that a delayed refund will make it even more difficult for these low income taxpayers.
Various consumer advocates have complained for many years that the long wait between tax filing and issuance of a refund, created the market for very high interest rate RAL’s (refund anticipation loans.)
As technology improved, it allowed the IRS to issue refunds faster, thereby reducing the gap. In addition, the IRS discontinued the procedure that allowed RAL lenders access to information where they could evaluate the risk factor of the loan.
Thankfully, that shrank the RAL market, but unfortunately it opened the door to identity thieves. These individuals filed fraudulent returns with fake W-2’s, claiming tax credits with large refunds.
Congress now hopes that the new guidelines will close some of those doors and give the IRS more time to review returns and match the information. This would ensure that the tax refund is issued to the correct person and thereby reduce fraud perpetrated by identity thieves.
Questions to the IRS on how they plan to implement these new law changes went unanswered. One question that I have is what additional funding will be required. I don’t believe the new law made any provision for additional funding.
Who would have ever thought that filing for a tax refund could be so complex? Do you think the many tax laws and changes over the years had anything to do with the upcoming tax refund delay?