February 15. Remember that date.
Millions of Americans count on receiving a tax refund in January, but they'll need to mark a new date on their 2017 calendar for getting that check. In order to give the IRS more time to detect possible fraud, Congress has allowed the agency to delay some refunds this coming tax season. And that's going to hurt a lot of people.
It is now against the law for the IRS to issue a refund before February 15 to any taxpayer who is claiming the Additional Child Tax or Earned Income credit.
You may have read about some of the major provisions of the latest tax bill, known as the PATH (Protecting Americans from Tax Hikes) Act of 2015. The 233-page legislation did include more than $620 billion in tax reductions for families and businesses.
At first glance, the fraud provision also seems to have merit. Many criminals hack taxpayers' financial information and file first to steal refunds. It's a growing problem that costs the government billions. The approach seems logical, too: delay tax refunds by a month to give the IRS and tax preparation firms more time to analyze W-2 forms and potentially stop fraud.
The problem is that this further punishes the victims. The Earned Income Tax Credit is a benefit for working people with low to moderate income, according to the IRS.
CPA Gary Bloome notes, "Most of the recipients of the earned income tax credit (EIC) are at or near the poverty level, and it seems unjust to burden this group with unnecessary delays. The stated impetus for the legislation is to reduce fraud in the EIC and Additional Child Tax Credit. As paid tax preparers, we are responsible for performing adequate due diligence on the returns to be assured that the taxpayers are entitled to these credits. Delaying the payments for a month would not increase the due diligence and would not reduce the fraudulent returns."
According to a Wall Street Journal report, by Feb. 12 this year, the IRS had already processed 29.2 million refunds totaling $94 billion. It's not clear how many refunds would be delayed this coming year, but the major concern is for low-income households.
By our estimate, the new rule could affect 30 million taxpayers by delaying more than $100 billion in refunds.
The issue here for half the country is timing. Congress hasn't considered the economic impact of tax refunds to American citizens.
In my 47 years in the industry, I estimate that more than 50 percent of American citizens have relied on refund money as a type of catch-up measure: to pay rent, to pay off holiday bills, and in some cases, simply to feed their families.
CPA Ken Kring says, "Obviously, the clients that will be hit the hardest will be those filing taxes in an income range of $5,000 to $25,000 per year. With those income numbers for a family of two, it is very difficult to make ends meet from month to month. Many of our clients go throughout the year borrowing from others or getting behind on bills. Come January, they can file and receive an EITC income tax refund and get caught up on bills. For many, that's the only time of the year they will be caught up."
Liberty Tax owner Darlene Cook adds, "These are normal, everyday, hardworking Americans trying to provide for their families. We commonly see families using these refunds to buy larger-ticket items such as cars, medical bills, other household needs that they cannot afford on their regular income. They plan around these refunds to provide necessities for the family. The timing of these refunds is crucial."
Raymond Nations, a fellow with the National Tax Practice Institute, says, "Single mothers will be hit the hardest because it seems in lower-income areas they are least likely to receive child support, and if child support is received it is usually very low."
We've even seen some of our clients forgo paying their January rent in order to buy Christmas gifts, and then catch up later with their refund. Terrible plan, but it's the reality in the U.S. for those with no financial cushion or no jobs.
No refund means no rent and a possible increase in the number of delinquency notices and actual evictions. Landlords will also have to adjust, and the domino effect--more like the economic butterfly effect--will continue.
Think about the economic impact on stores such as Walmart and Target. These discount organizations record billions in revenue in late January tied to the IRS refunds.
Certainly our greatest challenge in the tax industry is fraud and identity theft, and this past year I met several times with other industry leaders, the IRS, and the Treasury Department to come up with innovative protection measures for American taxpayers. Delaying your refund was not one of our ideas.
February 15. Plan accordingly for your family, and, hopefully, Congress will wake up and realize how badly this will hurt the people who need tax refunds the most.