The IRS has announced plans for processing returns next year, and the result could mean a delay in refunds. This delay affects those taxpayers who claim the Earned Income Tax Credit (EITC) and/or the Additional Child Tax Credit (ACTC). Early filers who claim either of these credits will not see a refund (if one is due) until after Feb. 15, 2017.
Congress enacted the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) on Dec. 18, 2015. This law mandates that “no credit or refund of overpayment for a taxable year shall be made to a taxpayer before Feb. 15 if the taxpayer claimed the Earned Income Tax Credit or Additional Child Tax Credit on the return,” according to theIRS.
The IRS must hold the entire refund until the specified date, including the portion not associated with the EITC or ACTC. The reason for delaying the refund is to allow the IRS more time to investigate the possibility of identity theft and refund fraud related to either of these two credits. The IRS estimates that approximately one quarter of EITC claims are paid in error and attribute that to the complexity of the law and intentional disregard of the law (www.eitc.irs.gov/Tax-Preparer-Toolkit/faqs/fraud).
AccountingWeb.com reports that for fiscal year 2013, the IRS paid an estimated $13.3 billion to $15.6 billion in error regarding the EITC.
What Should You Do?
First, ensure that you are entitled to either of these credits. To qualify for the EITC, you must meet all of the criteria:
- Have earned income and adjusted gross income within certain limits
- Meet certain basic rules
- Either meet the rules for those without a qualifying child OR have a child that meets all the qualifying child rules for you, or your spouse if filing jointly.
You may also qualify for the ACTC which is the refundable portion of the Child Tax Credit (CTC). The CTC is up to $1,000 per qualifying child and is non-refundable (i.e. it cannot reduce your tax liability to less than zero, generating a refund). However, if you do not qualify for the full amount of CTC, you may be able to take the refundable ACTC. If you qualify for the EITC, you may also qualify for the CTC and ACTC, but there are different criteria. Namely for CTC, the qualifying child must be under age 17.
If you may be affected by this refund delay, you should still file as you normally do or schedule an appointment with us as you normally do. Once filing season begins, the IRS will process returns normally. The only change is withholding refunds until Feb. 15 for EITC- and ACTC-related tax returns that are filed early in the year. The IRS states that it still expects to issue most refunds in fewer than 21 days.
Reduce Your Refund
If you are affected by the refund delay regarding the EITC and ACTC, you can change your withholdings to get more of your money throughout the year. If you are anticipating a refund and need help with cash flow issues, it is recommended that you change your federal withholdings by updating your W4.
It’s not too late to make an adjustment to your withholding if you are one who gets a large refund. File an adjusted W-4 with your employer to reduce the amount of tax withheld from each paycheck.
If you are uncertain about the steps to take, review IRS Publication 505 (Tax Withholding and Estimated Tax) and/or Publication 919 (How Do I Adjust My Tax Withholding?). Orcontact us. We will be happy to review your situation and help you adjust accordingly. It’s your money, so it’s better to bank it now rather than wait on that refund.