A tax mystery: Why are fewer people getting refunds?

The number of people who owe the government has also been rising.

The number of refunds is down 3.3 percent so far this year, following a longer trend. | Brendan Smialowski/AFP via Getty Images

If it seems like you’re not getting a tax refund like you used to, you’re not alone.

The share of taxpayers who get money back at tax time is slowly and, a little mysteriously, shrinking. At the same time, the number of people having to cut a check to the government has been rising.

The number of refunds so far this year is down by 3.3 percent, according to the latest IRS statistics that came out before Monday’s filing deadline. It was down last year too, and the year before that.

While no one is exactly sure why, some point to changes in the way people work. Others suspect it has to do with the way the government calculates how much in tax should be withheld from people’s paychecks. And the reversal of fortune could have consequences for how and whether people comply with tax laws.

“We want to make sure that people are, in fact, filing,” said Bob Kerr, a former longtime IRS official, now a Washington-based tax practitioner. “And there are a whole bunch of people who do it because it pays to do it.”

“I think this is really going to be a problem.”

Before the pandemic, about three-quarters of filers typically got refunds. Now about 65 percent do. The IRS distributed fewer refunds last year — 105 million — than it did in 2010, despite collecting 20 million more returns.

Refund dollar amounts are holding fairly steady. For those who’ve gotten one this year, the average payment is $3,011, up $133 from last year.

Some say the drop in the number of refunds going out the door is a good thing because getting one is tantamount to giving the government an interest-free loan by overpaying your taxes earlier in the year.

But refunds are touchy politically and economically.

People use them as a sort of forced savings, they interpret them as a barometer of how well they’re faring under the tax system and they look forward to big payments at tax time.

For some, it’s the largest single payment they receive all year.

Some tax vets wonder what a decline in refunds will mean for tax compliance.

Surely some people file because they feel it’s their duty, and others because they are afraid of the IRS. But the promise of a four-figure payment is a key way the tax agency, not to mention the tax prep industry, lures people to do their taxes.

“Two of every three taxpayers that are going to file by tonight’s deadline are actually owed a refund — and so it’s in your interest to get your taxes done,” IRS Commissioner Danny Werfel said in an interview Monday with CNBC. “We’re going to pay you.”

Suddenly owing the IRS can be an especially rude awakening in the wake of the coronavirus outbreak, when refunds surged as the government doled out hundreds of billions of dollars in assistance.

IRS Commissioner Danny Werfel speaks during an interview at IRS headquarters in Washington.
“Two of every three taxpayers that are going to file by tonight’s deadline are actually owed a refund — and so it’s in your interest to get your taxes done,” IRS Commissioner Danny Werfel said in an interview Monday with CNBC. “We’re going to pay you.” | Susan Walsh/AP

It’s also a big change from the pre-pandemic years, when the number of people getting repaid at tax time was extremely predictable.

For years, the share of filers receiving payments hovered around 75 percent, with people typically getting about $2,800. That climbed during the pandemic, thanks to things like a temporary boost in the Child Tax Credit, before recently sinking to levels not seen in at least 15 years.

Meanwhile, the number of people owing at tax time has been surging. Nearly 40 million people had balances due last year, up by a third from the pre-pandemic years.

All of that also makes the IRS’s job harder because it means there are more people to chase down if they haven’t paid or paid enough.

“It stresses the tax system — the IRS has got a lot more tax debtors,” said Jim Buttonow, a CPA in Summerfield, North Carolina.

The decline has left many tax vets scratching their heads.

It may be because more people are earning income that isn’t subject to the tax-withholding system, where employers automatically take tax payments out of people’s paychecks before they receive them.

There are a lot more people working as Uber drivers, renting homes through Airbnb, delivering food through DoorDash and other parts of the so-called gig economy whose earnings aren’t subject to withholding.

They’re supposed to instead be making quarterly “estimated” tax payments to the IRS — and if they haven’t, they’ll be in a for a nasty surprise when they file.

“That eats up a refund almost instantaneously,” said Buttonow.

Same goes for people trading stocks and cryptocurrencies. The market has been way up, which means more people with capital gains — who may not even know what estimated tax payments are.

The number of filers charged penalties for failing to pay estimated taxes jumped last year to 13 million, a one-third increase compared to the year before the pandemic, IRS statistics show. More than four million of them made less than $75,000.

Some also point to the withholding system itself, which the Trump administration revamped in the wake of its 2017 tax cuts. As part of that law, Congress threw out the old system of personal exemptions — and, with it, the familiar concept of withholding allowances, such as claiming a dependent child.

It was replaced with a new system designed with an eye towards reducing refunds.

“We were trying to make it more accurate,” said Dave Kautter, a former top tax official who worked on the issue.

The new method is a less blunt approach towards withholding that takes into account more information about people’s individual circumstances.

It’s also a lot more confusing, requiring people to essentially do a mini-tax return to estimate their withholding.

The IRS has posted an online calculator to help people navigate it, but practitioners say it has befuddled many taxpayers, if they’ve even realized there is a new withholding system — another reason why people may be surprised this tax season.

“It was intended to be far more accurate, but it is admittedly daunting,” said Pete Isberg, a vice president at the payroll processor ADP.

“The IRS and consumer advocates had made it a priority to get withholding closer to actual liability, which is arguably contrary to most taxpayers’ preferences for significant tax refunds.”

Source: Politico

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