How a Government Shutdown Affects Your Tax Refund

Government shut downOn Thursday, Senate Majority Leader Harry Reid announced that there will likely be a government shutdown effective Friday at midnight. In response to the deadline, the U.S. Office of Personnel Management has posted information on its website indicating that federal employees whose salaries are funded through annual appropriations won't be able to work and will be furloughed, unless their duties qualify under the law as "excepted" to continue to work during periods of lapsed appropriations. That means approximately 800,000 government workers will be asked to stay home until the budget crisis is resolved. And yes, that includes those government workers at the Internal Revenue Service.

Don't get too excited, though. The IRS Commissioner, Doug Schulman, has announced that a government shutdown will not affect the due date for federal income tax returns. Tax Day is still April 18, 2011. Even though the due date remains the same, there will be some noticeable changes if the government does shut down. Chief among them: There will be a delay in processing paper returns, which are those returns taxpayers mail through the U.S. Postal Service or have submitted using a private delivery service. A delay in processing will likely mean that there will be a significant lag in your refund if you submit a paper return this year or if your return must be processed manually because you are claiming a first-time homebuyer's credit or the newly refundable adoption credit.

Fortunately, most taxpayers have already submitted their tax returns. As of March 25, the IRS reported receipt of 82,760,000 individual returns; total receipts are expected to hover around 140,000,000. About one-third of all individual tax returns for the year will be mailed between now and Tax Day, April 18. Most of those taxpayers won't be seeking a refund, however. Statistically, taxpayers expecting to receive a tax refund file early in the season; those taxpayers expecting to pay a tax bill tend to put it off toward the end of the season. That is proving true this year since, according to IRS data, approximately 85% of taxpayers who have already filed received a refund.

While delayed tax refunds may be cause for concern for some taxpayers, others are getting a reprieve. With nonessential workers on furlough, audits and collections activities are likely to slow down.

Of course, these actions are all dependent on an actual government shutdown. How likely is that to happen? Consider this: The fiscal year is 189 days old and Congress has yet to pass a budget. Instead, Congress has passed six -- yes, six -- short-term spending bills. The first proposed budget was submitted by President Obama last year, an amazing 431 days ago. There has been no real movement since. Nobody knows for certain what will happen next ... but don't be surprised to see a "Closed" sign on the IRS doors next week.

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