Tax Refunds Could Be Grounded By Debt Ceiling Stand-Off

Is there a danger that the IRS won’t make good on its promise to send speedy federal income tax refunds to taxpayers? That’s a distinct possibility, according to Treasury Secretary Jack Lew and the Democrats on the House Ways & Means Committee.
It’s already been a rocky start to the 2014 tax-filing season. The official kickoff date was postponed to January 31 –- a delay of ten days –- due to the government shutdown last October. The IRS claimed it needed the extra time to modify its systems and update forms. Now the nation’s tax collection agency could be facing a crisis of another sort.
On February 3, Secretary Lew followed up on a prior request for Congress to raise the federal debt ceiling. Without such an increase by the end of February, at the latest, Lew argued that the government won’t have enough money in its coffers to pay out the refunds. (He also said that it will take some fancy footwork, in the form of accounting measures, to sidestep a calamity after February 7.)
“We will be left with only the cash we have on hand and any incoming revenues to meet our country’s commitments,” said Lew in a speech to the Bipartisan Policy Center, a not-for-profit Washington-based think tank. “Notably, we expect our outlays over the coming weeks to exceed our net inflows—largely due to the payment of tax refunds—so we will draw down our cash balance faster than at other times of the year. Without borrowing authority, at some point very soon, it would not be possible to meet all of the obligations of the federal government.” 
The sentiment has been echoed by all sixteen of the Democrats on the House’s tax-writing committee. In a strongly worded letter sent to Speaker of the House John Boehner (R-OH) on the same day as Lew’s speech, they pointed out that 110 million taxpayers received refunds averaging $2,700 in 2013, with nearly half those refunds being claimed by March 1. They complained that maneuvering by House Republicans to avoid increasing the debt ceiling unless certain demands are met will affect the IRS’ ability to provide timely tax refunds. 
“Failure to act quickly will endanger our economic recovery and send a signal to American taxpayers that their refunds may be in jeopardy, potentially raising unnecessary panic among families awaiting their tax refunds,” the Democratic committee members wrote. “Past Republican default threats rattled our economy and cost Americans hundreds of billions of dollars in lost retirement savings, increased the cost of owning a home, and cost us hundreds of thousands of desperately needed jobs. Let’s not add delaying tax refunds to the list. We look forward to working with you to protect American taxpayers.”
Obviously, there’s some political jockeying going on here, as finger-pointing continues on both sides of the aisle. Nevertheless, the potential threat to the public appears real.
Keep in mind that there’s no statutory requirement in the tax code for paying out tax refunds by a certain time. The only deadline for refunds relates to interest payments. If the government waits longer than forty-five days after the filing deadline to pay refunds, it will owe interest on that money. In other words, the IRS isn’t under any legal obligation to send out tax refunds by a specific date, but interest will start accruing on May 31. 
The IRS has boasted in the past about its ability to provide speedy refunds. Frequently, checks and electronic funds transfers go out within days of a return being filed. However, taxpayers may be in rude shock this year if the debt ceiling isn’t raised. As a result, you might advise clients who expect to receive refunds to assemble their filing information as soon as possible. The sooner you can file their returns for them, the better the chance they’ll receive a fast refund. 


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