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U.S. Taxpayers Claiming EITC and/or ACTC Totally Screwed by Congress

Refunds for Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) will be delayed until late February.

Many low-income taxpayers will face an unpleasant surprise — their refunds will be delayed due to a new law passed by Congress.  taxrefundcheck-janedoe

The Protecting Americans from Tax Hikes (PATH) Act requires the IRS to delay refunds to taxpayers claiming the EITC or ACTC until at least February 15, 2017, and more likely until late February. The IRS must delay the entire refund – even the portion not associated with the EITC and ACTC – until that date.

The PATH Act mandated the tax refund delay in order to give the IRS more time to help detect and prevent fraud involving the EITC and ACTC. The IRS has cautioned that, while it will begin to release EITC/ACTC refunds starting February 15, these refunds likely won’t arrive in bank accounts or prepaid cards until the week of February 27 due to “several factors, including banking and financial systems needing time to process deposits.”

The tax refund delay will likely cause problems for many taxpayers who receive the EITC or ACTC. These taxpayers are low-income working taxpayers, the vast majority of whom have children. They often depend on receiving their refunds early in the tax season to help pay for groceries, holiday bills, overdue utility debt, or other pressing expenses.

Even though refunds may be delayed, taxpayers should still file as early as possible.  In addition to making sure the refund can be processed as soon as possible after February 15, early filing provides a cushion of time if a tax return has other issues, such as math errors.

Lack of minimum standards for paid tax preparers continues to be a serious problem plaguing taxpayers. In all but four states (CA, MD, NY and OR), paid tax preparers are not required to meet any minimum educational, competency, or training standards. While some tax preparers are licensed as certified public accountants (CPAs) or credentialed by the IRS as enrolled agents, these certifications are not mandatory and most preparers do not have them. Indeed, the only tax preparers — apart from CPAs, attorneys and enrolled agents — required to pass a test are the unpaid volunteers at Volunteer Income Tax Assistance (VITA) and AARP Tax-Aide sites.

The lack of competency standards for paid tax preparers exposes consumers to potential errors or even fraud, as well as potentially costing federal and state governments tens of millions of dollars in lost tax revenue. Multiple rounds of mystery shopper tests of tax preparers have found high levels of errors, ranging from 25% to over 90%, and even instances of fraud.

With the PATH Act tax refund delay, “no fee” RALs may prove attractive to many consumers. These are loans that are secured by the taxpayer’s refund, but the lender does not charge the taxpayer a fee or finance charge. Instead, some lenders charge the preparer a fee. Many lenders and preparers call these products an “advance,” but they are actually a loan.

Advocates recommend that taxpayers avoid no fee RALs if possible. One risk is that some unscrupulous tax preparers might charge more in their tax preparation fees to “no fee” RAL borrowers. Also, last tax season lenders such as EPS and River City Bank appeared to actually impose a price for “no fee” RALs by charging a higher price for a refund anticipation check (RAC) if the preparer was offering these loans. (With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund monies. After the refund is deposited, the bank issues the consumer a check or prepaid card and closes the temporary account. RACs do not deliver refund monies any faster than the IRS can, yet cost $25 to $60.)

If a taxpayer is determined to get a “no fee” RAL, advocates advise that it is absolutely critical to choose a preparer very carefully.

A free or inexpensive alternative for low-income taxpayers is free tax preparation sites, including VITA sites (1-800-906-9887 or www.irs.gov) and AARP Tax-Aide sites: (www.aarp.org/findtaxhelp). Choosing a VITA or AARP Tax-Aide site saves eligible taxpayers the cost of a tax preparation fee. Many VITA sites can also help taxpayers open a bank account or get a low-cost prepaid card, which enables taxpayers to get refunds faster via direct deposit without paying a fee. Free tax preparation may be available on military bases as well.

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