Tax credit processing delays, immigrant fears and ITIN changes fuel early tax filing slowdown
The Internal Revenue Service and state tax authorities are seeing a sharp decline in tax filings during the first weeks of tax season.
The slowdown may be due to delays in processing the Earned Income Tax Credit and the Additional Child Tax Credit, fears of extra scrutiny of tax returns of undocumented immigrants by the Trump administration, and new requirements for renewing Individual Taxpayer Identification Numbers. The IRS reported that for the week ending February 3, the number of returns received had declined 24.3 percent.
The Center for Economic Progress, a group that helps low-income families with tax and financial services, held a press conference Thursday in Chicago to highlight the slowdown in tax filings.
“As of yesterday the IRS reported that they’re running $58 billion behind in paying out tax refunds this year when compared to last year,” said Center for Economic Progress president and CEO David Marzahl. “So we’re talking about a lot of money.”
He believes the primary driver in reducing the number of tax filers in the past three weeks since tax season opened is a provision that Congress included in the PATH Act of 2015. It requires the Internal Revenue Service to delay refunds for any tax return claiming the Earned Income Tax Credit or the Additional Child Tax Credit until after February 15 to give the IRS extra time to check the returns for identity theft.
“This is due to concerns around fraud and error that the IRS is reviewing,” said Marzahl.
Another issue his group is concerned about, which was also mandated by Congress in the PATH Act, requires holders of Individual Taxpayer Identification Numbers to renew their ITINs with the IRS if the numbers have not been used in the past three years on a federal tax return. ITINs are often associated with immigrant workers. “The ITIN is used by tax filers who do not have a Social Security Number to meet their tax-filing obligations,” said Marzahl. “This has a big impact on metropolitan Chicago. That’s well over 12,000 people who [may] need to renew their ITINs and will not get their refunds unless they do so. We think this is cause for concern with respect to the reduced number of people filing tax returns this year.”
He is seeing a steep 20 percent drop in the number of tax returns filed by his own group, which participates in the IRS’s Volunteer Income Tax Assistance, or VITA, program, to help low-income people file their taxes.
“The biggest driver without question is the delay in EITC and Child Tax Credit payments,” he told Accounting Today after the press conference. “It’s not just that the dollars paid out are down by a huge number. It was $45 billion. That’s driven to a large extent by the fact that the IRS has not processed any of the EITC or Child Tax Credit returns because they said they’re not going to be processing any of those until February 15 at the earliest. I just saw some IRS overall tax-filing data. It’s not just that the volume of refunds are down, but that they’re actually seeing less returns, not just processing less.”
The slowdown could also have an impact on the wider economy. Goldman Sachs analysts estimated this week that the tax refund delay could decrease consumer spending by $21 billion this month (see Consumer spending could hit a pothole with tax refunds still in the mail).
“I think we’re in effect pushing the tax season back,” said Marzahl. “A lot of people used to file in late January and February, especially those expecting large refunds, but word is out the IRS is delaying the refunds so they’re going to be filing in the second half of February into March.”
He also sees an impact on immigrants from not only the new ITIN rules, but also the recent executive orders from President Trump on immigration.
“I think a bigger trend and worry in immigrant communities is that people just may not want anything to do with government and may not file at all,” said Marzahl. “And I don’t think it helps at all when you get a leaked executive order on immigration that says it will now be a deportable offense for immigrants to utilize public benefits, including refundable tax credits. I think a climate of fear has been created in immigrant communities that not only is going to drive them potentially underground altogether, but away from government benefits and programs.”
The victims may be the children of immigrants, along with the wider economy. “Where I think that falls hardest is for families that have U.S. citizen children, because in effect we’re punishing children who are born in this country for decisions their parents made,” said Marzahl. “That’s a deep and abiding worry of mine. In those parts of the country where there are large numbers of immigrants, this will have a ripple economic impact because there will be less money flowing in and out of those communities as well.”
Marzahl admits it is still too early in tax season to know for sure what the overall trend will be with tax filings. “I think there will be much better data as we head through the tax season, but anyone who is working in immigrant communities in Chicago and around the nation is saying the same thing, that people are deeply worried and concerned, and many of them are saying why should I even file a tax return and risk making myself known to the immigration authorities by doing so.”
Pedro Diaz of The Resurrection Project, a community group in Chicago, talked at the press conference about some of those fears. “We are also hearing many concerns from the community regarding tax filings,” he said. “Recent actions from the new administration and the IRS announcement of additional enforcement actions related to the EITC are causing widespread fear across immigrant communities. The IRS’s additional enforcement is being interpreted as additional vetting of household tax filings and legal status.”
His group is partnering with the Center for Economic Progress, the Mexican Consulate and community-based organizations to disseminate information about tax filing and the EITC program, along with protection of assets, in workshops they are presenting in churches, schools and other community locations. He hopes that will provide much needed advice to the immigrant community.
“They fear the additional enforcement will be through an audit of previous filings,” said Diaz. “Because of this fear, many families who are eligible for the EITC are considering not filing this year, even though they have filed in the past. ITIN holders who also have filed in the past are very fearful of additional government scrutiny and question whether filing at this moment will put them at risk.”
Sergio Guzman of the IRS’s Chicago office also spoke at the press conference and acknowledged that tax filings have declined somewhat compared to last tax season, although he pointed out that tax season also started a few days later.
“Yes, tax filings are down from last year, and I suspect that the refund hold that Congress mandated at the end of 2015 plays a role in that,” he said. “The other thing to keep in mind is that this year the tax season did start slightly later than last year, so that also can be a factor.”
He encouraged those who have not filed yet to take advantage of VITA providers such as the Center for Economic Progress and the United Way of Chicago.
“Even though tax filings are down somewhat this year, there’s still a lot of time to file a return,” said Guzman. “Just because there is a refund hold, the IRS is doing checks that we’ve been doing now for a few years, so the risk of greater scrutiny or an audit, I don’t think that’s necessarily the case. One of the reasons is that Congress passed a law to allow the IRS additional time to do certain checks that we needed to do. The bottom line is that you shouldn’t be afraid to file your return, and you should take advantage of the free tax assistance services that are out there. I encourage everyone to do so.”
Unregulated Tax Preparers
Marzahl of the Center for Economic Progress said he sees some contradiction in the fact that the IRS is promoting the use of the EITC through annual events like the recent EITC Awareness Day, while also subjecting such tax returns to additional screening.
“I think there’s a bit of a dissonant message, where the IRS says it’s EITC Day, claim your EITC, but at the same time they’re pushing out all of this information in social media and traditional media saying you’re not going to get your Earned Income Tax Credit refund until late February, so in this case market forces have already spoken and people are filing later,” he said. “I think a big, big question for the end of the filing season will be do we see a reduction in the number of people claiming the EITC, because that’s one of my fears and it’s why we did the press event earlier today because I think we’re creating some dissonance for people just to claim credits and refunds that are rightfully theirs.”
He pointed out that the IRS’s extra scrutiny of tax preparers could be a contributing factor as well.
“I do think that one issue we have is that while there is definitely an unfortunately high incidence of fraud and error in the EITC program, that the actual biggest problem we think lies with the paid preparers who are unregulated and who have a lot of incentives to get people to claim refunds that are not rightfully theirs,” said Marzahl. “The fact that there are no minimum standards for paid preparers creates a marketplace for fraud and error. The data is going to tell us a story, but only part of the story. Certainly we do applaud the IRS for trying to go after refund fraud. We think that’s important. We don’t want to undermine the integrity of the EITC, but they have to balance those efforts against discouraging people who are legitimately eligible.”
He also blames Congress for pushing such mandates on the IRS while refusing to provide enough funding.
“Congress mandated this,” said Marzahl. “They did it very late in the year. The PATH Act was passed in December . The IRS was not able to actively engage in conversations with Congress about how they would be able to put all of those safeguards in place. At a time when the IRS budget has been cut 20 percent over the last five years, they’re struggling to comply with a congressional mandate. In fact, the IRS, if they were given some more budget flexibility, has better ways to actually reduce refund fraud. But I think all of these efforts make sense and are worth pursuing. I just do not want them to result in legitimate claims for the EITC or Child Tax Credit either being denied, or worse, people deciding not to file because it’s not worth their while to do so.”