In an effort to shore up its system and detect and prevent identity theft and fraud, the Internal Revenue Service (IRS) will be delaying the refunds of over 40 million low-income families this year.
A congressional mandate, set to begin this tax season, is requiring the IRS to hold refunds on tax returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) until mid-February. According to the IRS, this change is being instituted in an effort to help ensure that taxpayers get the refund they are owed by giving the agency more time to help detect and prevent fraud.
The EITC is one of the federal government’s largest anti-poverty programs. However, this program has been plagued by billions in losses due to improper payments each year, including overpayments, underpayments and payments that outright defrauded the government.
Chuck Marr, director of Federal Tax Policy at the Liberal Center on Budget and Policy Priorities believes that this program is vital to lower income families. In 2014, about 29 million families received more than $72 billion in earned income credits.
“The EITC is a pro-work success,” he told the Associated Press. “It encourages work, it rewards work, and it has long enjoyed bipartisan support for those reasons.”
Protection at a cost
The trade-off the IRS is making is especially tough for the working lower class. Statistics show they depend heavily on these yearly tax refunds. IRS Commissioner John Koskinen says the agency is sensitive to the fact that many of these taxpayers need their refunds to pay bills or settle debts.
“For most of these people it’s the biggest check they are going to get all year,” Koskinen said in an interview with The Associated Press. “We are sensitive to that.”
He advises the tax payers that will be most affected by the change, to plan for the delay. Dave DuVal, vice president of customer advocacy at TaxAudit.com, believes that even with planning, the impact on this group of taxpayers could be tremendous.
“They live paycheck to paycheck, and this is money they’re counting on,” he said.
The tax filing season starts January 23rd. but the new law requires the IRS to delay tax refunds for people claiming the EITC and ACTC credits until February 15th. Add to that the additional time needed for claim processing and you get even longer delays. According to Koskinen, folks shouldn’t even begin looking for a refund until the end of February–at the very earliest and should plan ahead.
The IRS estimates that it issued $3.1 billion in fraudulent tax refunds to identity thieves in 2014 and in 2013 they paid out a staggering $5.8 billion in phony refunds. However, during those two years, the IRS says it was able to prevent paying nearly $47 billion in fraudulent refunds.
The breaches involved the compromise of over 464,000 unique social security numbers (SSN), and of that total, 330,000 SSNs were used to successfully access an electronic file (E-file) personal identification number (PIN).
Hackers reportedly not only stole SSNs but also other personal data and accessed millions of completed tax returns. The hackers were then able to use the stolen information to file for bogus tax refunds, resulting in the theft of over $50 million in federal funds.
Are the delays worth it?
The IRS says that while the delays are required by law and are an important security measure, most refunds will be issued within 21 days.
“These increased security screenings are invisible to most taxpayers,” Koskinen said in a statement on the IRS website. “But we want people to be aware we are taking additional steps to protect taxpayers from identity theft, and that sometimes means the real taxpayers face a slight delay in their refunds.”