Direct Deposit Refund Rule: New for 2015

Nowadays almost everybody files their Federal Tax Returns electronically.  The IRS has encouraged e-filing for many years now.  It’s a win-win because the IRS can process electronic returns very rapidly and the filer is happy to avoid the delay and uncertainty of snail mail.  Similarly, most people who are due a refund elect to have that refund directly deposited into their bank account rather than having a paper check mailed to them.

Beginning in January 2015, there will be new direct deposit limits that the tax refund folks should keep in mind.  The IRS is limiting the number of electronic / direct deposit refunds that can be deposited into a single account.  The magic number is three.  The reason the IRS is limiting directly deposited refunds to three per account is to hopefully curtain fraudulent refunds which tend to come flooding into a thief’s account one after another.

Two refunds deposited into the same account is probably fairly common: I am imagining a married couple who file separately but share a bank account.  A little odd maybe, but not suspicious either.  Three refunds deposited into the same account is somewhat less common, I am sure.  But some families with adult children may fall into this category.  The IRS has drawn the line at three because it is hard to imagine a scenario where there would be too many more than three people who would chose to receive separate refunds in the same bank account.

The IRS says that the fourth refund in a scenario such as this would be sent as a paper check, and those wishing to avoid this result would need to use a different account.

1st Grade Tax Tips

Do you endorse the "shoe box" strategy of document storage?

This is usually the time of year when people start digging through their file, or shoe box as the case may be, in an effort to get started on their dreaded Form 1040.  If you wait until the eve of tax day, then you’ll find yourself furiously rifling through said shoe box.  And if you really use a shoe box to secure your important records, then chances are you not very organized, and you have other records scattered all throughout the house or in multiple files on your computer.

I know that nobody ever taught you about income taxes or finances in grade school; my kids haven’t had that class yet either.  But as they get older, I do intend to impart some wisdom on them, even if by force.  And for now, there are many habits I can help them develop that will hopefully carry over into their adult life and will make their future April 15ths that much more bearable.

1.  “Get started on your homework right after school.”    If you at least begin the process with a few weeks to spare, then when things come up that inevitably pull you away from the task at hand, you will still have time to put out those fires and get your return filed on time.  And, if due to your personal high principles, you refuse to pay Uncle Sam a nickle before the 15th, at least have it ready to go, then you can hit “send” at 11:59pm.

2.  “Keep everything in your backpack.”    It really doesn’t matter if you’re using a shoe box for your tax docs.  A shoe box works just fine if all your stuff fits in there.  One disorganized shoe box is way better than having multiple piles around the house.  The key is to keep everything together.

3.  “Once it has been graded, throw it out.”    Sometimes we want to save a particularly well-made craft or an A+ essay, but most of the stuff that comes home from school each day goes directly into the trash.  We couldn’t possibly save everything, nor would we want to.  Same with your tax records.  If you can access it online, then why keep a paper copy?  The “three-year rule” should generally suit you just fine.

2014 Tax Season: Status Check

Today the IRS released some key filing season statistics to show how they are doing compared to last year at this time.

So far the IRS has received some 49.6 million tax returns and has processed around 98 percent of them.  A vast majority of those returns were filed electronically — about 46.6 million.  If you hadn’t noticed, as much as the IRS loves sending taxpayers mounds of mail, they really do not like receiving it.  Hence the constant emphasis on e-filing.

So far the IRS has paid out over 40 million tax refunds; most of them being directly deposited.  As much as the IRS loves sending taxpayers mounds of mail, they really do not like sending paper checks.  Hence the constant emphasis on direct deposit.

One stat that always blows my mind is the average refund amount, which is now over $3,000.  I think that number tapers off as we approach the tax filing deadline since those who are eager to file early are typically the same people who expect a fat tax refund.  Personally I would rather pay what I owe in April than give the government an interest-free loan throughout the year.

And finally, the statistic that has left me wondering is the irs.gov website traffic.  This is one of the only stats that has dropped since last year.  The only other stat that is lower this year is the number of e-filed returns by tax professionals, but this is probably going to continue to drop as the number of e-filed returns prepared by taxpayers from their home computers (self-prepared returns) continues to rise.  Could the decreased website traffic mean that people are relying more heavily on tax software?  Could it mean that taxpayers are turning to the phones more than in years past?  There are a million possible explanations.

FTB Holding $16 Million in Returned Tax Refunds

When you move to a different residence, do you immediately contact your creditors to let them know where you are?  Suuuure you do.  When you get around to it…

It’s no secret that some people spend their lives moving from place, just one step ahead of the IRS or other taxing agencies.  Although certainly not advisable, some people have good reasons for keeping their location a secret.  And then there are the others.  The brilliant 45,000 or so people in California who haven’t claimed their prior year state refund(s) yet.  The refund amounts range from $1.00 to $54,000.00 (total more than $16 million), and a majority of these people simply moved and didn’t update their address with FTB.  In other words, it isn’t so much that they haven’t claimed the refunds, but they were returned by the Postal Service due to the FTB having a bad address.

There is an easy fix to this problem.  Keeping your address up-to-date would be one way, but there is an even better fix.  DIRECT DEPOSIT.  If you use direct deposit for your tax refund, you get your payment so much quicker, and if you move you still get paid right on schedule (assuming you didn’t change banks).

EIN Refund Fraud

Tax Refund Fraud.  We’ve seen this happening across the nation in a variety of communities.  The fraudster demographic is also quite diverse: some perpetrators are operating from within experienced fraud rings, some are regular street criminals (or inmates), some are even IRS insiders.

Most people are probably aware of individual refund fraud, which involves the filing of a false tax return using a stolen Social Security Number in hopes of obtaining a refund.  Many of these schemes are built upon the idea that the IRS doesn’t bat an eye if the requested refund is small enough.  And fraudsters can get pretty rich if they file in bulk.

But did you know that the same thing is happening with EIN numbers?  An Employer Identification Number is used to identify business accounts.  People steal them and obtain them fraudulently just like they do with social security numbers.  The statistics are staggering: “277,624 stolen EINs used to report false income and withholding on 752,656 tax returns with potentially fraudulent refunds issued totaling more than $2.2 billion” (2011 numbers).  The Treasury Inspector General for Tax Administration (TIGTA) released a report this week asking the IRS to do more to prevent EIN refund fraud.

IRS Not Prepared for New ACA Fraud Opportunities

The Treasury Inspector General for Tax Administration (TIGTA) is concerned that the IRS is not prepared to combat the onslaught of tax fraud that is anticipated once the IRS begins paying premium tax credits associated with the Affordable Care Act (ACA).  TIGTA recognizes that the IRS has systems in place to combat fraud in general; it has always been one of their top priorities.  But specific ACA fraud is another story.  The IRS is not prepared for this new responsibility which is bound to reveal unforeseen nuances.  The IRS has tested its systems that compute subsidies under ACA and the testing revealed flaws that could result in the IRS being unable to identify fraud prior to the issuance of credits.  In plain English, what this means is there is a significant risk that the IRS will inadvertently pay out credits to people who don’t really qualify.  According to the IRS, they have already made system corrections prior to the issuance of today’s report and they will be prepared.

IRS Hesitates to Enforce Erroneous Refund/Credit Penalty

If you file a tax return and claim a refund, but it turns out that you should not have claimed a refund (or if you claimed an excessive refund), you could be liable for payment of penalties.  Similarly, if you made an erroneous or excessive claim for a tax credit, the IRS has authority to assess penalties.  The penalty could be as much as 20 percent of the erroneous refund or credit claim, and it may be assessed without regard to the taxpayer’s good intentions.  Innocent mistakes are equally subject to penalty.

The IRS hasn’t been very diligent in enforcing this penalty in the past several years, but the Treasury Inspector General for Tax Administration (TIGTA) hopes that will change.  In a recent audit report, TIGTA discovered that the IRS had initially misinterpreted the law allowing assessment of penalties, and then even after modifying their official interpretation, still failed to adequately enforce it.

It seems hard to believe that there would be a tax penalty statute on the books that the IRS wasn’t interested in enforcing, but it’s true.  Between May 2007 and May 2012, the IRS assessed only 84 erroneous refund penalties totaling $19 million.  That’s only about 17 per year, although the average assessment was upwards of a quarter million each.  It looks like the IRS had been targeting only the most egregious high-dollar cases.

In May 2012 the IRS admitted the tax law interpretation error and published an updated memorandum, but still has not put into place processes and procedures to guide front-line IRS personnel who make the day-to-day decisions of whether or not to pull the trigger on penalties.  Consequently, between June 2012 and May 2013, the IRS had allowed over 700,000 erroneous tax credits to slide by un-penalized to the tune of $1.5 billion in lost revenue.  And it is not just about lost revenue; it is about training the American taxpayer to be careful with the claims made on tax returns, because errors and false claims impose a big burden on the IRS in terms of both time and money.

Still Waiting on Your Tax Refund?

By the time you read this article, you should have that interest free loan that you gave to Uncle Sam returned to you via your federal tax refund. This assumes that you filed your tax return on time, and that you exercised savvy tax planning so that you didn’t incur a tax debt. So have you already spent your refund, or are you still waiting for the money you’ve already earmarked for that desired frill?

According to the IRS, they generally issue refunds within 21 calendar days of receiving your tax return. This is, of course, if you E-File your tax return and disclose your banking information for purposes of direct deposit. If you snail mail a paper return and want a check or savings bond snail mailed back to you, your refund should arrive in about six to eight weeks.

Should you have received your refund already? Still waiting? You may want to use the IRS’ where’s my refund tool available online at www.irs.gov or as a smartphone application. If you are still left wondering where your money is, like many have been this tax season, a systematic approach may help you alleviate your anxiety if you think you should have already received your refund.

Step 1: Were there basic errors on your tax return?

The first question you need to answer is whether you made an error on the face of your tax return. This includes, for example, using the wrong social security number, making computation mistakes, checking wrong or multiple boxes, failing to sign your return, or pay for postage. Any of these seemingly simple tasks results in common errors which will likely cause an error in the initial processing of your tax return and a delay in issuing your refund. So double check your tax return before sending it, and if you’re still waiting for your refund, maybe check the copy of your tax return (you did save a copy your return, right?) and see if there is some basic error that needs to be corrected.

Step 2: Do you owe the government?

So you reviewed your tax return and confirmed that you made no errors on the face of the tax return. Then, the delay in receiving your refund may be more problematic. I receive calls every year from people who owe the government taxes or some other type of debt and are wondering why they didn’t receive their refund that they had already earmarked for some necessary expense. Unfortunately, the federal government, like any other creditor, isn’t going to give your money back when a debt is owed. If you owe the government, it’s almost certain that your refund was applied to your debt in the best interest of the government.

Step 3: Was your tax return more complex?

So you’re certain that you don’t owe the federal government any money and that you made no errors on your tax return; then what are the other reasons that your refund may be delayed? A refund may also be delayed if you use an Individual Taxpayer Identification Number, amend a tax return, or claim specific tax credits that need to be manually reviewed like the adoption tax credit, for example. Or, maybe the IRS is examining/auditing or disputing some item(s) on your tax return. The latter is usually not the normal operating procedure for delaying a refund as the refund is normally issued, and then months later an audit notification is sent, then informing you that your tax return is being audited. However, it is always a possibility especially if you are using novel accounting practices or extreme red flag expenditures.

Step 4: Have you moved recently?

The IRS will mail to you notifications regarding delays, examinations, or other problems in issuing your refund. If you recently moved, you may not be receiving notification from the IRS explaining what actions are being taken on your account causing your refund to not be timely issued. Therefore, you or your authorized representative may need to contact the IRS to determine why your tax refund has been delayed. This is the case even if you did not move and you have not received an explanation for the delay.

Lastly, the government is back-logged and does make mistakes; this is always a consideration when waiting for a refund check that doesn’t come. This basic approach will hopefully help you determine when it’s time to contact the IRS for clarification or seek professional assistance in obtaining that tax refund that you’ve already counted on to get through the month.

Refund News: Some Good, Some Bad

The Good

The IRS is sitting on $917 million in refunds for people who haven’t yet filed their 2009 tax return.  They made the announcement today via IRS Newswire.  See IRS Newswire Issue Number IR-2013-29.  If you’re wondering why they waited until 3 years later to get the word out, well it is with good reason.  As you know, if you are due a refund, the only way to claim it is to file a return; the IRS won’t just write you a check on its own initiative.  But even if you are due a refund, you can only delay so long before the money becomes property of the US Treasury.  By law, taxpayers have 3 years from the date that the return is due to file and claim a refund.  2009 taxes would have been due on April 15, 2010, so the three year mark is coming up in about 30 days.  Over 984,000 people didn’t file their 2009 return, so many of the refunds are fairly small.  But the IRS estimates that over half of the unclaimed refunds are over $500.  Therefore, it is well worth the time and expense to file it, particularly if you can claim the Earned Income Tax Credit (EITC) for that year.

The Bad

The IRS swore that delaying the start of tax season would not result in delayed refunds, but this may have been a promise that was impossible to keep.  On March 12, the IRS released the following statement:

The IRS is aware of a problem with a limited number of software company products that affected some taxpayers filing Form 8863, Education Credits, between Feb. 14 and Feb. 22. The problem resulted in those tax returns requiring additional review by the IRS.

What this means for taxpayers who expect a refund is they may have to wait 4-6 weeks longer than previously expected as the IRS looks more closely at their Form 8863.  90% of those who claimed the education credits will get their refund right on time.  The software glitch was with H&R Block, so it is only the 8863s filed by that company that are subject to further IRS review.  I guess the silver lining here is with respect to balance due returns. Tax assessments will presumably be delayed as well, which could give people some extra time to figure out how to resolve their tax debt.

Wal-Mart and the EITC

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit that was first offered to taxpayers back in 1975 to help prevent low income families from slipping into poverty.  EITC can mean tax relief (lower taxes) for some and a tax refund (cash in pocket) for others.  When EITC exceeds the amount of tax owed, it results in a tax refund for those who qualify.  As you can imagine, the EITC is one of the tax provisions that is most susceptible to fraud.

Most people who file early expect a tax refund, often due to EITC claims.  Apparently Wal-Mart stores possess a key indicator of how many EITC claims are being made each tax season.  So far this year Walmart’s numbers are low.  Wal-Mart stores have cashed a mere $1.7 billion in refund checks so far this year compared to $3 billion this time last year.

The reason why Wal-Mart’s numbers are off is actually two-fold.  First, the start of tax season was delayed this year, and a whole week’s worth of tax refund checks could add up to at least another $1 billion or so.  Second, and more importantly, the IRS is reviewing as many EITC claims as possible this year to try to identify fraudulent claims.  However, according to the IRS no more than 5 percent of EITC claims are being delayed.