Managing client expectations for IRS refunds.

Author:Mattson, Andrew M.

In fiscal year 2017, the IRS issued $437 billion in refunds. Almost all of these refunds (98%) were issued to individual taxpayers, and this amount does not include overpayments credited to subsequent years' tax liabilities (Internal Revenue Service Data Book, Tables 7 and 8 (2017)). To facilitate this volume of refund payments, the IRS has devoted a significant amount of resources to improving and maintaining its electronic filing and refund direct deposit systems. Indeed, from 2010 through 2016, the IRS spent on average $4 billion annually on operations support, including infrastructure and information systems, to ensure returns are processed efficiently and refunds are issued in a timely manner (Internal Revenue Service Data Book, Table 28 (2010-2016)).

When these resources work as planned, a taxpayer's refund can be issued in as little as 10 days, with most refunds paid within 21 days, and tools such as "Where's My Refund?" and e-Services provide important feedback to the taxpayer to accurately set expectations for processing times. While these processes work well for many taxpayers, they do not work for all refund claims. The purpose of this column is to describe reasons for delayed refunds and the actions practitioners can take when a client is experiencing a delay.

Reasons for delayed refunds

One explanation for a delayed refund is increased scrutiny of returns that include certain refundable tax credits. The Protecting Americans From Tax Hikes (PATH) Act of 2015, P.L. 114-113, included a provision (Section 201) that prevents the IRS from issuing a refund for a tax return including the earned income tax credit (EITC) or the additional child tax credit (ACTC) until Feb. 15. The effective date for this policy change was Jan. 1, 2017. Under these new provisions, the IRS may not issue the entire refund until Feb. 15 even if the refund is only partially attributable to the EITC or the ACTC.

As these refundable credits are a rich target for individuals attempting to file fraudulent returns, this mandatory delay gives the IRS more time to evaluate taxpayers' eligibility for the credit(s) before issuing the refund. During the first year of this new process, the IRS did not update "Where's My Refund?" until Feb. 18. While some taxpayers who filed their returns before this date received a projected payment date for their refunds before the Feb. 18 update, many others received only a message that the IRS was processing their returns with no expected payment date for the refund. Once the IRS released the refunds, many taxpayers did not receive their payments until the week of Feb. 27. According to the IRS, many factors contributed to the delay, including increased processing times needed by banks and...

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