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Taxpayer refunds are being held up for months as states try to ferret out tax fraud.
This article was originally published at Stateline, an initiative of The Pew Charitable Trusts, and was written by Elaine S. Povich.
Last year, Georgia blocked more than $98 million in state income tax fraud. This year, determined to root out more attempted fraud, Georgia and at least 20 other states are making taxpayers wait longer — sometimes a lot longer — for their refunds.
Colorado and Louisiana, for instance, warn of delays of up to 60 days after filing. In Virginia and West Virginia, the delays can last up to four weeks. Massachusetts says it can take taxpayers four to six weeks to get their refunds, North Carolina says six weeks, and New Mexico warns it could be 12 weeks. Wisconsin says it could take as long as three months. Hawaii is looking at as much as 16 weeks.
The delays, state officials say, give revenue departments time to double-check returns to ensure that they are authentic and not filed by fraudsters using stolen personal information. They also give states time to compare taxpayers’ returns with employers’ filings of wages paid. And there’s a built-in hedge against fraud because thieves tend to file early, while legitimate taxpayers tend to file later.
“If a return looks questionable, we have somebody that takes a closer look,” said William Gaston, spokesman for the Georgia Department of Revenue. “It does slow down the process. It’s worth it because we are protecting taxpayer dollars.”
If you want to blame someone for your late state refund, start with Utah (even if you don’t live there). Swamped by fraudulent returns a couple of years ago, the Utah Legislature became the first in the nation to legislatively mandate a delay in paying out refunds until a certain date — in its case March 1. If both employer and employee electronically file forms earlier, that date can be moved up. Many others have followed — either by setting specific dates or stating that they can hold refunds for a set time, in most cases 90 days.
The IRS also can shoulder some of the blame. This year it delayed federal income tax refunds for returns for taxpayers who claimed the earned income tax credit and the additional child tax credit, under a mandate from Congress to combat tax fraud. Those two categories are high targets for fraudsters because taxpayers get cash back, even if they don’t owe taxes. And the federal delay contributes to state delays because most states link their income taxes to the federal return.
According to IRS figures through March 10, 6 percent fewer refunds had been paid out than at the same time last year, 56.2 million compared to 59.7 million. The amount paid out is down 5 percent from last year, $167.1 billion compared to $175.9 billion.
“Anybody [in a state revenue department] can process a return in 24 hours. You don’t want to,” said Verenda Smith, executive director of the national Federation of Tax Administrators, an organization of state tax officials.
Smith would like to see refunds held for as long as four months to do all the verifications. But most states are more likely to wait about three months.
States like Georgia have anticipated taxpayer concern over sitting on refunds and have mounted information campaigns to alert taxpayers to the delays. And Georgia reminds taxpayers who call the state’s “taxpayer advocate” office to inquire about the status of their refunds that they can expect delays.
“Due to fraud prevention,” the office’s automated voice message says, “the department is taking additional precautions. Your refund may take 90 days to process. We appreciate your patience.”
Gaston said most Georgians appear tolerant of the delay. But Liz Coyle, executive director of the consumer group Georgia Watch, said the delays can cost low-income taxpayers if they take advances from tax preparation companies in anticipation of their expected refund.
Although “refund loans” with high interest rates were outlawed in the U.S. in 2012, unscrupulous lenders may still make them, she said. And legitimate tax preparation firms still give advances in anticipation of the refunds. They are not allowed to charge interest, but they can add “fees” to the preparation itself which may reduce the amount of the refund.
In addition, she said, a delayed refund means many people have to put off purchases.
“For many Georgians, that tax refund is one of the most significant financial events they have all year and they do wait for it,” Coyle said.
Fraud Prevention Tactics
States have taken a number of extra steps to try to thwart fraud, as the amount of refunds they paid out on bogus returns mounted into the billions of dollars in recent years. And more steps are being taken all the time.
Some states such as New York and Ohio now require taxpayers to submit their driver’s license information with their returns. The information is not required on federal returns, but preparers are told by the IRS to confirm the identity of the filers for whom they prepare returns.
Timothy Gagnon, an associate professor of accounting at Northeastern University, questions the effectiveness of states asking for driver’s license information.
“They don’t think someone who got your Social Security [number] and name and address won’t have that?” he said sarcastically. “And I don’t like them collecting more information that they don’t need to have in their files.”
In contrast, Gagnon said, delaying refunds is a good fraud-prevention tactic, although delays burden some taxpayers, usually lower-income filers, more than others.
“If you are a taxpayer who applies your refund to next year’s [taxes] it has no effect,” Gagnon said. “But if you over-withhold and are waiting for the refund, you may file in February and have to wait until May.”
Utah revenue officials have little doubt that delaying refunds helps prevent fraud.
In 2014, the state detected and halted the payout of $5.6 million worth of fraudulent returns, according to Charlie Roberts, spokesman for the Utah State Tax Commission.
In 2016, after the Legislature mandated holding the refunds until March 1, the amount saved rose to $12.9 million.
Other states have adopted the delaying tactic to screen for fraudulent filings. Hawaii, for instance, is warning state taxpayers that it can take up to 16 weeks for refunds to start flowing.
Before it stopped $11 million in attempted fraud last year, said Mallory Fujitani, spokeswoman for the Hawaii Department of Taxation, the standard wait for refunds had been about six or eight weeks “at the height of tax season.”
Fujitani said complaints from taxpayers and state employees have diminished since there has been a concerted effort to explain the reasons behind the delays and everyone has gotten more comfortable with the longer lead times.
But there ultimately may be a limit to how long taxpayers accustomed to filing their returns in January or February will put up with states sitting on their refunds, warns Smith of the tax administrators group.
“I’m enough of a realist to know that nobody’s going to start holding refunds until the middle of May,” she said. “But that’s the direction it’s been moving in.”
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