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IRS refund slog may bog down economy

| Friday, Jan. 24, 2014, 11:47 p.m.
Justin Merriman | Tribune-Review
Jamillia Diggins, an employee at Liberty Tax Service in Lawrenceville, works on paperwork on Friday, January 24, 2014.

It's happening again.

More than $40 billion in federal income tax refunds won't go to taxpayers in January because the IRS says it needs an extra 10 days to get ready to process the usual avalanche of returns. It blamed a 16-day government shutdown in October.

Like last year, when the IRS delayed early refunds, experts say this delay will affect consumers, retailers and the economy in general, even if only for a couple of weeks.

These experts consider the delay to be a symptom of larger problems, saying that the IRS doesn't have resources to perform all the tasks Congress has assigned it and that lawmakers are reluctant to give it more money.

In December, Acting IRS Commissioner Danny Werfel said the agency would start accepting and processing 2013 tax returns on Jan. 31, not Jan. 21.

“The late January opening gives us enough time to get things right with our programming, testing and systems validation. It's a complex process,” Werfel said. “The October closure came during the peak period for preparing IRS systems.

“More than 50 IRS systems handle 150 million tax returns. Updating these core systems is a complex, year-round process, with the majority of the work beginning in the fall of each year.”

An IRS spokesman did not respond to questions seeking details about why it couldn't catch up in the months since the shutdown.

Dan Pilla, a critic of the IRS and executive director of Tax Freedom Institute in Minneapolis, said the delay isn't surprising.

“They've got a lot of programming to do,” he said. “But I do know that in 2013, there was significantly less impact on IRS than in 2012, when it took Congress until Jan. 1, 2013, to pass the American Taxpayers Relief Act, and that delayed the filing season. It took the IRS a long time to get caught up from that. ... They didn't have that kind of programming changes this time around.”

Congress adopted the American Taxpayers Relief Act of 2012 after long debate about expiring tax and spending cuts.

The IRS workload has ballooned, experts say, including a significant role in enforcing and administering the Affordable Care Act.

“That involves a massive expansion of the power and reach of the IRS,” Pilla said in a report. “One of the key reasons the IRS has grown so large and powerful over the past several decades is that Congress continues to hand the IRS the duties of administering social programs.”

The IRS estimated it would spend nearly $1 billion in 2013 on information technology costs alone, Pilla said. Estimates are that it will take a minimum of 5,000 and perhaps as many as 16,000 new employees to carry out mandates under President Obama's signature health care law.

“I am concerned about the IRS' capacity to manage this massive legislation,” Pilla said.

Pete Sepp, executive vice president of the National Taxpayers Union in Alexandria, Va., said the agency is retooling to accommodate many Obamacare responsibilities. “The key question is this: Was the IRS a little behind on some of those processes before the shutdown?” he said.

Since 2010, the agency's budget has decreased by 8 percent as its workload grew, said Nina E. Olson, the National Taxpayer Advocate in a report last week. That “predictably impaired the IRS' performance,” she said, noting that last year the IRS answered only 61 percent of customer service calls and most of those people waited on hold nearly 18 minutes.

The agency lost big in the 2014 budget deal that House and Senate negotiators agreed to last week. The IRS will get $11.3 billion, or $526 million below its 2013 budget and lower than agency spending in 2009, according to the House Appropriations Committee.

With its staffing problems, “The timeliness of performance suffers,” said Robert Strauss, professor of economics and public policy at Carnegie Mellon University. He has advised the IRS and worked as a deputy Treasury secretary and on the Joint Committee on Taxation in the 1980s.

“Outsourcing may not be the answer, as we are seeing with Obamacare,” Strauss said. But he noted that Congress is reluctant to give the agency all that it asks for, “because if you give the IRS all the money it wants, it will be putting more pressure on people to pay taxes.”

The extent of the impact on the economy is unclear, because IRS delays are recent phenomena, experts say.

“In 2012, $40 billion in refunds were paid out in January, and in 2013, zero refunds were paid in January,” said John Hewitt, CEO of Liberty Tax Service, which has 4,100 locations nationwide and 19 in the Pittsburgh area. “Many corporations depend on consumers spending their refunds in the first quarter of the year. A delay is bound to hurt the economy.”

Many taxpayers file early to get quick refunds, said Tish Heiss, owner of the Liberty Tax franchise in Lawrenceville. “They are stressed, looking for money to pay Christmas and other bills.” Some families that get refunds based on earned income tax credits and child tax credits expect $1,000 to $6,000, she said.

John D. Oravecz is a Trib Total Media staff writer. Reach him at 412-320-7882 or

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