In a congressionally-approved change aimed at battling tax refund fraud and identity theft, the IRS must hold tax refunds until Feb. 15 for the millions of Americans who claim the Earned Income Tax Credit or the Additional Child Tax Credit.
However, not all of the information that is being shared about the delay is correct. The delays are not discretionary, the decision to hold refunds is not controlled by the Internal Revenue Service (IRS), and not all taxpayers will be affected.
Affected taxpayers should expect the IRS to hold their entire refund check. The IRS isn’t allowed to release the part of the refund that is not associated with the EITC and ACTC.
So why the delay? And why those two credits?
The EITC and the ACTC are both refundable tax credits. A refundable tax credit can reduce your tax liability below zero. If the amount of the refundable credit is larger than the amount of tax you owe, you are due a tax refund. With a refundable tax credit, you can get a tax refund even if you didn’t have any tax obligation and even if you didn’t pay into the system.
By way of comparison, a nonrefundable tax credit means you get a refund only up to the amount you owe for taxes. With a nonrefundable tax credit, a taxpayer can only reduce tax liability to zero: there is no refund for excess nonrefundable credit. Nonrefundable credits are the most common type of tax credits.
You can see, then, why taxpayers love refundable credits and why thieves and scammers love them, too.
The new delay will give the IRS extra time to check 2016 filings for signs of fraud, including identity theft, before refunds are mailed.
The IRS estimated that 24% of all Earned Income Tax Credit payments in fiscal year 2013 (roughly $14.5 billion) were mistakenly paid. Although some errors were unintentional, resulting from the credit’s qualification complexity, others involved filers who intentionally disregarded legal qualifications, the IRS says.