January 23 begins the tax filing season, but for many, 2017 may prove a little slower than previous tax filing cycles.
To combat identity theft and fraud, the Internal Revenue Service (IRS) is delaying tax refunds for over 40 million low-income families this year. These delays are expected to affect families claiming the earned income tax credit and the child tax credit.
Though the IRS intends to issue more than nine out of ten refunds in under 21 days, a new law — the Protecting Americans from Tax Hikes Act, or PATH — requires the IRS to delay refunds to anyone claiming the aforementioned benefits until February 15. Of course, processing times will delay most of the refunds until the end of February.
The purpose of the delay is to provide the IRS additional time to screen tax returns for fraud, which occurs more often than the public may expect. In 2014, the IRS estimates that it issued $3.1 billion in fraudulent tax refunds to identity thieves. In 2013, the estimate was about $5.8 billion in fraudulent tax refunds. The agency successfully stopped at least $47 billion in fraudulent refunds in the combined two years.
This delay affects low-income and working-class families because the earned income tax credit (EITC), though one of the federal government’s largest anti-poverty programs, is prone to billions of dollars in erroneous payments every year. Overpayments, underpayments and fraud are three of the most common public errors, and criminals have become adept at manipulating the system. According to the U.S. Treasury Department, approximately $17.7 billion in EITC payments were issued improperly in 2014.
Another program that enables increased fraudulent behavior is the additional child tax credit (ACTC), which also aids low-income families. Families with children are generally eligible for a $1,000 tax credit per child; an increased tax credit also benefits low-income families who cannot claim the full credit, as they do not owe enough in federal income tax. Over 20 million families claimed $27 billion in ACTC in 2014.
Middle-class or top-earning families are unlikely to experience delays, as they are typically ineligible to claim EITC or ACTC status.
In 2017, the IRS plans to process over 153 million tax returns — over 70 percent of which will end in taxpayer refunds. Vigilance in controlling identity theft, which is currently a multi-billion dollar industry, is arguably more necessary than ever.
Fortunately, the efforts seem successful. Last year, 275,000 U.S. taxpayers reported stolen identities to the IRS — a 50 percent drop from 2015.
The downfall is that the protective measures delay legitimate refunds, to the tune of 1.2 million returns — or about $9 billion — as of last year, according to the National Taxpayer Advocate.
February 15 marks the release date for EITC and ACTC tax refunds, but the IRS warns that taxpayers will likely not see returns in their bank accounts until the week of February 27. Interest-free loans are available to taxpayers in the interim between filing and receiving tax refunds.
Luckily, there are steps one can take to avoid a refund delay.
- The IRS encourages taxpayers to double-check information entered into tax-filing software; simple oversights and errors are an easy path to refund deferral or stall.
- Be certain to file a complete tax return, and beware computation errors, which are easily avoidable using popular tax preparation software or with the assistance of a tax preparation specialist.
- If necessary, renew your Individual Taxpayer Identification Number (ITIN) — any ITIN that was unused in the past three years expired on January 1, 2017, thanks to Notice 2016-48 of the PATH Act.
- File on time, and enter direct deposit or bank information correctly to avoid any additional delays.