IRS Refund Delay and Real-Time Tax System

The Internal Revenue Service needed to put the brakes on its tax refunds this tax season when newly installed filters to prevent tax fraud and identity theft held up processing for a week or more.

The IRS sent out a notice to tax professionals last Thursday apologizing for the delay (see IRS Warns of Tax Refund Delays). The IRS noted that the delay only affects some early filers, and taxpayers whose returns were accepted by the IRS on or after January 26 would not experience the delay. Their tax returns would be processed normally.

However, a number of taxpayers who filed early were dismayed to see the estimated time of arrival in the Where’s My Refund tool on the IRS.gov site shift back a week or even two weeks, or they encountered error messages when they tried to access the tool. Readers left comments on the Accounting Today site expressing their frustration and how it was going to make it harder for them to pay their bills. One of them was a taxpayer facing eviction if she didn’t receive the tax refund that she was counting on.

Tax prep chains like Jackson Hewitt and H&R Block have been fielding calls from anxious customers whose refunds have been caught up in the delays. Fewer tax prep chains offered refund anticipation loans and rapid refunds this tax season because the IRS eliminated the debt indicator last year, and banking regulators put pressure on typical RAL providers to get out of the business of offering the loans to tax preparers, so more taxpayers have been left waiting for the tax money they were promised.

The IRS has been accelerating its efforts this tax season to prevent identity theft and tax refund fraud by installing new filters in its computer systems to try to catch identity theft attempts before issuing refunds (see IRS Steps up Efforts to Combat Identity Theft). The agency has come under pressure in Congress and from the National Taxpayer Advocate and the Treasury Inspector General for Tax Administration to do more about the growing problem of identity theft that has kept taxpayers from getting their refunds at all.

Typically the thieves have been filing for tax refunds early in tax season so they can claim the money before the real taxpayers can get it. The new identity theft screening filters are supposed to improve the IRS’s ability to spot bogus tax returns before they are processed and before a refund is issued.

The IRS is also putting identity theft indicators on taxpayer accounts to track and manage identity theft incidents. Those efforts have led to a series of arrests, indictments and search warrants around the country. On Tuesday, the IRS and the Justice Department announced that they conducted a massive nationwide sweep, rounding up 105 people in 23 states (see IRS and DOJ Bust Identity Thieves across U.S.).

While the IRS has been taking steps to crack down on identity theft, the effect on its computer systems shows that the agency is going to need to do more testing before rolling out the “real-time tax system” envisioned by IRS Commissioner Doug Shulman. He wants to create a system that will automatically match tax returns as they’re filed against the third-party information returns that businesses have filed, such as 1099s, in order to do cross-checking before issuing a tax refund (see IRS Commissioner Doug Shulman Wants a Real-Time Tax System).

As he described it to Accounting Today senior editor Roger Russell last year, Shulman said, “The broad outline of that is having a tax system in which we load our system with information returns before the filing occurs. We do a lot more matching work, potentially blocking work, and helping taxpayers correct their return as it comes in. Consequently, instead of interacting with people after the fact, which is quite burdensome, we get accurate returns in the first place. If this is executed correctly, and this is a long-term execution, we would see a tax system with a lot less burden on the American taxpayers and with much higher compliance.”

While a real-time system could help cut down on the lengthy back-and-forth during IRS audits and examinations, which can last for years, there is a danger too in rejecting tax returns before processing them, as shown in this tax season’s tax refund delays. The IRS has already experienced many problems and delays over the years with the roll-out of its Modernized eFile system. It will need to do careful testing of any new system that performs extensive amounts of filtering if it wants to prevent tax refund delays that could last a lot longer than a week.

Otherwise tax clients will be making many worried calls to their tax preparers asking, “Where’s my refund?” If the date for that answer keeps shifting on the IRS’s online refund-tracking tool, or produces an error message as it did for some taxpayers earlier this season, that’s going to leave tax practitioners struggling to answer their clients’ questions in future tax seasons.