Could tax refunds be delayed this year?
Last fall, when Congress was still struggling over a tax law compromise, the IRS warned that failure to reach an agreement would drastically delay taxpayer refunds in 2013. The IRS had already reprogrammed its computers assuming that there would be an inflation adjustment made to the Alternative Minimum Tax for 2012. Failure to protect middle-class taxpayers from the AMT would have been unprecedented. Without the patch, the Service would have to reprogram its computers in January. If the Congress had reached a later compromise in 2013 and made it retroactive, yet another round of reprogramming would have been needed.
As it turned out, a compromise was reached, and the AMT was patched. In fact, the fix was made permanent. The AMT will now be automatically adjusted for inflation every year. No longer will Congressional action be needed every year or two. This change was the single most expensive piece of the American Taxpayer Relief Act, scored at costing the government $1.8 trillion in tax dollars over the next ten years.
Even though the AMT disaster did not materialize, the lateness of the tax legislation has created other headaches for the IRS that may affect the speed at which refunds are processed this year. Another issue has emerged as well: widespread fraudulent tax returns.
Stolen identity refund fraud (SIRF) has become a major headache for the IRS. There were 51,000 confirmed cases in 2008, and that exploded to 1.2 million in 2012. An estimated $20 billion in fraudulent refund claims were blocked in the first ten months of the year. The IRS has doubled the number of personnel dedicated to just this problem and trained an additional 35,000 agents on how to help the victims of this crime.
Remarkably, many of the frauds originate in prisons! For example, on January 16, 2013, a Georgia inmate pled guilty to claiming $3.4 million in fraudulent tax refunds. He was in jail for filing a fraudulent state tax return. The IRS had paid him $2.8 million before he was caught. Fraudulent tax returns from prisoners doubled from 45,000 in 2009 to 91,000 in 2010, according to a January report by the Treasury Inspector General.
The extra steps that the IRS is taking to screen for identity theft, coupled with the very late tax changes from Congress, could delay tax refunds this year.
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