Taxpayers are already voicing their displeasure about delayed tax refunds in 2017 – and tax season just opened. However, not all of the information that is being shared about the delay is correct. The delays are not discretionary, the decision to hold refunds is not controlled by the Internal Revenue Service (IRS), and not all taxpayers will be affected. Here’s what you need to know.
More than a year ago, Congress passed the “Protecting Americans from Tax Hikes (PATH) Act of 2015.” The section of the law that focuses on refunds, section 201, kicks into gear this year. Under the new law, the IRS must wait until February 15, 2017, to issue refunds to taxpayers who claimed the earned-income tax credit (EITC) or the additional child tax credit (ACTC).
Affected taxpayers should expect the IRS to hold their entire refund check. The IRS isn’t allowed to release the part of the refund that is not associated with the EITC and ACTC.
So why the delay? And why those two credits?
The EITC and the ACTC are both refundable tax credits. A refundable tax credit can reduce your tax liability below zero. If the amount of the refundable credit is larger than the amount of tax you owe, you are due a tax refund. With a refundable tax credit, you can get a tax refund even if you didn’t have any tax obligation and even if you didn’t pay into the system.
By way of comparison, a nonrefundable tax credit means you get a refund only up to the amount you owe for taxes. With a nonrefundable tax credit, a taxpayer can only reduce tax liability to zero: there is no refund for excess nonrefundable credit. Nonrefundable credits are the most common type of tax credits.
You can see, then, why taxpayers love refundable credits and why thieves and scammers love them, too.
In order to claim the EITC and/or the ACTC, you must have earned wages, typically reported on a form W-2 (or form 1099-MISC). Employers are required to furnish tax those forms to taxpayers by January 31. When it comes to reporting those forms to the government, however, employers used to be able to wait until the end of February, if filing on paper, or the end of March, if filing electronically, to submit these forms. Taxpayers who filed their taxes early would have filed before the IRS had even received those same forms from the employers. The result? Room for fraud. Scammers and thieves could, in some instances, file bogus returns weeks before the IRS had any chance to confirm wage information.
As part of the same law that delayed the refunds, the PATH Act, employers are now required to submit forms W-2 and forms 1099-MISC to the Social Security Administration (SSA) on January 31, the same date that taxpayers receive their forms. By pushing out the refund issue date to February 15, the IRS has time to match up the employer forms with the taxpayer forms. That should mean more accurate refund checks.
How many families will be affected? To put it in context, by February 12, 2016, the IRS had issued 29,155,000 tax refunds totaling $94.001 billion; by February 19, 2016, that number had bumped to 38,550,000 tax refunds totaling $120.574 billion. It’s important to note that not all refunds issued by those dates were for taxpayers claiming the EITC or the ACTC. However, anecdotal evidence suggests that those refunds which are processed early are heavily skewed towards taxpayers claiming the EITC or the ACTC. In terms of total numbers, preliminary data from IRS indicated that 28,881,720 taxpayers claimed the EITC for the 2014 tax year, and 20,518,813 taxpayers claimed the ACTC (note that some taxpayers could have claimed both) for the 2014 tax year.
The IRS still anticipates issuing more than 9 out of 10 taxpayer refunds in less than 21 days. The “Where’s My Refund?” tool is available on IRS.gov and mobile (the IRS2Go app, available through Google Play, the Apple Store, and Amazon) and is the best way to check the status of a refund. You can begin checking the status of your refund within 24 hours after the IRS has received your e-filed tax return or four weeks after mailing your paper return.