Don't count on that early tax refund this year
Tax filing season hasn't even started yet, and we have already fallen behind. The Internal Revenue Service made good on its threat to delay some tax forms if Congress went over the so-called fiscal cliff.
The tax agency said that because of last-minute and retroactive tax law changes, it would not be able to process any returns filed before January 30. Furthermore, a slew of late-changing forms would delay many more returns (perhaps as many as 20 million of them) until the end of February or the beginning of March. That's going to hurt those early filers.
Some 18 million returns typically get filed during the month of January, and 98 percent of those get refunds, according to H&R Block. Roughly 60 percent of those early filers really need the money, and use it to pay off holiday bills or meet January expenses, according to Intuit Inc.'s TurboTax.
Furthermore, there's plenty of speculation that the IRS may drag its feet on those refunds if Congress delays approving an increase in the federal debt borrowing limit. An independent think tank, the Bipartisan Policy Center, said in a report released Tuesday that if the federal government keeps up with other key spending, including food stamps, federal salaries, Social Security benefits and Pell Grants for education, it may not have the cash to pay an expected $85.5 billion in tax refunds to individual filers throughout the tax season.
For its part, the IRS is managing expectations on refunds. It has said that last year it paid out 90 percent of refunds in fewer than 21 days and it expects to do that this year too. But it has reserved the right to take longer on some refunds to do fraud checks and for other reasons. "Don't count on getting your refund by a certain date to make major purchases or pay other financial obligations," it says in guidance aimed at tax preparers.
In its new "Where's My Refund" website the IRS won't offer guesstimates on when refunds may be expected. It will simply tell tax filers if their return has been received, if it has been approved and if the refund has been sent.
And there could be logjams along the way. "It's going to be a challenge for the IRS to accommodate the returns coming in January 30," says Bob Meighan, vice president of TurboTax. "We are going to be stockpiling returns and having them ready to go."
The biggest logjams might not be at the IRS, which has demonstrated its capacity to process millions of returns, but in the offices of some tax preparers - as the more complex forms coming later in the season could squeeze a lot of those returns into a six-week period.
Nervous yet? Here's how to negotiate tax season 2012.
- If you were Sandy-afflicted, don't wait, suggests Kathy Pickering, executive director of The Tax Institute, a research group within H&R Block. People who suffered casualty losses because of the big storm, and who are in federally-declared disaster areas can go back and file an amended 2011 return and take your losses for that year. You can do that today, and it might make sense to get ahead of the January 30 crush at the IRS.
- Check to see if you're in the late list. The IRS has published a list of 30 forms that will be delayed. Most of them are arcane and will only affect less than 1 percent of tax filers, says Meighan. But a couple could hold up millions of forms. Most notable is the form that businesses use to claim depreciation. That form is used by many sole proprietors and other small business owners. Another popular but delayed form is required for folks who claim residential energy credits. The form for qualified adoption expenses is also on the late list.
If you need a form on the list, accept that you won't be able to file until late in the season, though you can probably get most of your paperwork done early. If you're concerned about your tax preparer not having enough time to squeeze you in between March 1 and April 15, consider filing for an extension of your time to file. You will still have to come close to paying your taxes due by April 15.
- Budget for winter. If you are a typical early filer with a simple return and a need for a quick refund, you can still get your return ready early, through Block or TurboTax or another preparer. Both of those megafirms are ready to deluge the IRS on January 30, and that means your refund should be in your bank account before the end of February.
But cast about for another source of cash to tide you over until then. Refund anticipation loans which allowed filers to borrow against their expected refunds, often at effective annual interest rates topping 100 percent, have pretty much disappeared from the landscape, with major lenders and tax preparers walking away from that business amidst heavy government pressure.
Live lean, delay paying off the credit cards for an extra month if you have to, and make sure you give the IRS a bank account number so it can direct deposit your refund as soon as it's ready.
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