Impending Y2K-like chaos neither candidate is addressing
The neediest Americans will be short $100 billion in delayed tax refunds at a time when they're really counting on it. Chaos may ensue, an issue neither presidential candidate is addressing.
In June, I sounded the alarm on How Congress is About to Screw Up the Economy in an Unprecedented Way. The more we learn about the PATH Act of 2015, however, the louder this alarm needs to be.
I'm now calling it Y2K for the Tax Industry.
First, a short primer on what's happening. The PATH Act stands for Protecting Americans from Tax Hikes. As a headline, it sounds commendable and does include legislation for more than $620 billion in tax reductions for families and businesses.
Unfortunately, the PATH Act also means a delay in millions of refunds. It is now against the law for the IRS to issue a refund before February 15 to any taxpayer who is claiming the Additional Child Tax or Earned Income Tax Credit. Congress has allowed this delay in order to give the IRS more time to detect possible fraud.
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The Earned Income Tax Credit is a benefit for working people with low to moderate income and, by our estimate; the new rule could affect 30 million taxpayers by delaying more than $100 billion in refunds.
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The question many taxpayers will be asking this season is "Where's My Cash?"
While the February 15 date creates a timing problem for our nation's economy, there will be additional problems that Congress clearly hasn't thought through. These checks will need to be cashed. Word on the street will be that taxpayers can get their refunds on the 15th. The fact is, banks don't keep that kind of cash on hand to serve millions of customers all at once.
Many clients cash their checks at Walmart or another check-cashing service, especially if they don't have a bank account. These organizations also don't keep that amount of cash available to serve this large number of consumers in one day. In other words, you may be holding a check that you simply can't cash right away.
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Computer system overloads could create more delays. This is the other reason I'm calling this Tax Y2K: a potential software glitch and/or system overload that could result when the IRS sends tax preparers a computer file that is at least 6 times larger than normal. This computer file contains information about the refunds due customers of that tax preparer.
Think of this as a massive download of information impacting $100 billion in refunds, all on one day. This needs to be processed by the IRS systems, tax preparers and the banks. Additionally, many check cashers use systems that help authenticate the check. These systems may not be capable of handling the massive volume, further slowing the process of customers getting their cash.
There's one more factor to add to this perfect storm. Historically, the IRS issues refunds to 85% of the taxpayers right away; 15% of the projected refunds are held for further checking; they may have back taxes or other issues that need to be investigated. Yet another delay to the already delayed tax returns.
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Get the picture? If there is a line down the block with 100 people waiting for their money on February 15th, an estimated 15 will go home empty handed. How do you think these people will feel and why does this matter so much? In June, I wrote about the impact on the poorest in this country.
We call it Tax-mas.
For Congress, we should just call this bad timing. Clearly, our lawmakers haven't considered the economic impact of tax refunds to American citizens. Neither presidential candidate is addressing this problem.
Think about it. Or maybe you've lived it. In order to have a better Christmas, many people don't pay their January rent on time; they catch up with their refund. Now they may be late on both January and February rent, creating a domino effect for both renters and landlords.
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In my experience, more than half of all American citizens rely on their tax refund to catch up on holiday bills or just provide food for their families. This is also the time millions of Americans go shopping. This delay will impact discount stores such as Walmart and Target, cell phone companies and other businesses which usually bring in billions of dollars in revenue in late January because of the tax refunds.
February 15th - Y2K for the Tax Industry.
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Unlike in 2000, when the fear of a massive computer crash was averted, unless Congress makes changes to this plan-- better yet, repealing the PATH Act-- chaos is a given.
For your family, plan for delays now and, hopefully, you can avert this crisis in your own home and business.
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