North Carolina is running out of cash. Of course, they’re not the first state to report economic woes: California has been making news for months with its deficit and New Jersey has just announced lower than expected revenues. With cuts at the federal level and revenues down due to increased layoffs, many states are facing increasing budget shortages.
What’s a state to do? Delay income tax refunds. North Carolina has announced that it will delay income tax refunds by about four weeks as they scramble to find cash to give to taxpayers. These four weeks are on top of the regular processing time. In fact, the NC state Revenue Department is warning that some returns may take as long as 12 weeks to process. Twelve weeks!
Secretary of Revenue Ken Lay (are you kidding me, NC?) assures the state that “everyone who is due a refund will get a refund.” You might just have to wait for it. And since NC state law requires that interest start running in June for delayed refunds, the state is hustling to get out as many refunds as possible, but it’s proving to be difficult: tax collections in NC are down by about $1 billion from last year.
So, since revenues are down and cash is scarce, taxpayers in NC who are owed refunds will just have to wait. But there is a lesson to be learned here, folks: you should not rely on your tax refund. With a little planning, you can have your money in your wallet all year long instead of waiting anxiously for your refund check. Remember, refunds are interest free loans to the government. You can do better!
Taxpayer asks:
What about a taxpayer who owes the IRS $$$ from previous tax years? Should they adjust their W-4 to have more taxes taken out to cover the Making Work Pay credit that will be on their paychecks?
Taxgirl says:
It depends. The Making Work Pay Credit is refundable, so to the extent that the withholding results in an overpayment at the end of the year, taxpayer would be entitled to a refund. The refund would, of course, be offset if there are existing tax liabilities. If withholding is adjusted to ensure that there’s no refund, then the refund would not be used to satisfy the existing tax liabilities.
Of course, that doesn’t change the outstanding liability. I often recommend that taxpayers with outstanding liabilities who receive a refund at the end of the year not alter their withholding. Most taxpayers don’t notice the few extra dollars each week and the refund helps pay down the liability. Most taxpayers in that situation wouldn’t save on their own in order to pay it down, so this “forced savings” can be a good thing.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
About 10% of my “ask the taxgirl” questions right now are asking “Where’s my refund?” – though, admittedly, some ask in a nicer way than others.
Your refund information is generally available about 72 hours after your tax return is processed. You can track your refund online with the “Where’s My Refund?” service offered by IRS. You can also call 1-800-829-1954. Have your a copy of tax return nearby when you call.
An important word of caution: If you use a third party tax preparer, professional service or software preparation service, and you opt to pay any fees (including preparation fees, “advances” or RAL fees) to those services out of your refund, the timing and conditions of those payments are subject to the terms of your agreement with the third party and not the IRS. If you are subject to the terms of those third parties, just because the IRS says that your refund has been issued does not mean that your money will automatically appear in your bank account. Be smart. Read that fine print.
Taxpayer asks:
Why was my RAL denied?
Taxgirl says:
RALs are refund anticipation loans. They are basically loans (usually high interest) against your refund from the IRS.
I am not a fan of the RAL. In many cases, I think they’re oversold to folks who can least afford to pay the fees when a normal direct deposit refund would be available within about 10 days for taxpayers who e-file. But I digress.
RALs are private loans to taxpayers. In many cases, the marketer of the loans, such as a tax preparation service, is not the same as the lender.
The IRS does not impose a fee for a refund either by direct deposit or check. However, the tax preparer may impose a processing fee for a RAL and the lender may impose a fee and/or interest. According to Americans for Fairness in Lending, the average RAL lender fee is $100. The interest rates for a RAL ranges from 40% to 700% depending on the size of the refund.
Not all RALs are subject to credit checks, though they may be required as part of the terms and conditions imposed by the lender. This is because your tax refund is used for collateral – the lender is entitled to use the refund for repayment – making the loan, in theory, not much of a risk. So, credit history may be a reason for denial in some cases, but is not the most common.
The most common reasons for a RAL denial are a refund that is smaller than anticipated (many banks impose a minimum refund in order to qualify) or a refund that has been offset. Examples of offset refunds are back taxes, child support obligations and outstanding student loans.
Additionally, your RAL may be delayed if you have large EIC amount and no prior year history. In that event, you will be asked to substantiate your claims.
If you are denied or delayed, you may request that your RAL application be reviewed again.
However, there are two situations where a review will not produce a different result:
1, Since banks are anticipating a higher than usual volume due to the Rebate Recovery Credit, some banks are choosing not to allow RALs that include a refund based on the Rebate Recovery Credit. I have heard that Republic Bank has instituted this rule. If you know of others, let me know.
2, Members of the armed forces on active duty are prohibited by federal law from receiving most RALs due to restrictions on interest rates. Apparently, H&R Block has created a Military Refund Anticipation Loan, which keeps the total amount of interest and fees below 36% (yes, that says 36%) in order to allow them to continue to issue RALs to active duty.
All of that said, you are usually liable for the bank and loan fees, even if your RAL is eventually turned down. If your loan is approved but you don’t receive a large enough refund to cover the cost of the entire loan, you may still required to pay back the loan.
The bottom line is that these are private loans and as private loans and if you use these services, you’re subject to their terms and conditions. I can’t make you not use these products. I wish that I could. But I do hope that you’ll ask the right questions and make smart decisions. Don’t get ripped off.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
Have a question? Ask the taxgirl! – Now on Facebook!
