I just got off the phone with an IRS agent. The IRS is cracking down on false earned income credit claims; I called them because two clients have yet to receive their refunds. I must understand the delay to properly advise my clients and/or prevent the problem in the future. For these particular clients, I am a third party designee, which allows the IRS to discuss their return with me for this year only. 

I was informed that they are waiting to verify the W2s of my clients. My mind immediately went to their earned income credit as the cause of the verification. Here’s why: the first and foremost qualification for earned income credit is, well, earned income. This means income that is taxable as social security income. These are reported on W2s, 1099-Misc, Schedule C, and partnership income. No other income qualifies. You may have children, be poor as a rock, but if you didn’t work or you only have passive or portfolio income, sorry, no earned income credit for you.

Earned income credit is also the easiest credit to claim because it’s the only credit that doesn’t require the taxpayer to have incurred an expense to claim. Other credits/deductions require related expenses to the credit or deduction. For instance, the child tax credit requires there to be a child which would create expenses (lots of it, in fact). Education credits require education expenses. Business deductions require business expenses, etc.

So of course fake W2s, 1099-MISCs, and Schedule Cs have run rampant due to folks cheating the system. Partnership income is harder to fake because it’s more complicated since you need: 1. another person, and 2. to first report it on a partnership return, which is rather expensive and a longer process. 

Thanks to the Protecting Americans from Tax Hikes (PATH) bill, the IRS has been combating false earned income credit claims since 2015. But tax season 2018, their process got better and stricter. In 2015, 2016, and 2017 tax seasons, I had zero EIC clients with refund delays. In 2018 tax season for, 2017 tax year, I had several. One client’s refund in particular wasn’t released until November. Yikes! 

As you can imagine, the delays in refunds were a thorn in my side. Clients, especially new ones, will only assume the tax person (me) screwed up their return. As far as they are concerned, this didn’t happen last year, or the years before so they may not be back next year.

Now the fact of the 2017 refund being released at all, albeit in November, does mean it was legitimate, but I find it extremely disturbing that it took so long. On this day of speaking to the IRS, I was informed that the delay is that the IRS now verifies W2/1099 data and WILL NOT release refunds until income sources have been verified. They will send a notice to inform the taxpayer of the delay. They will also notify the taxpayer if they need more time. Per the agent, IRS will even go so far as to request information (I’m guessing the W2s/1099s claimed) from the taxpayers in order to verify income.

I asked the agent about the reason income sources have suddenly became difficult to verify. There has been a process in place for decades now and since the 10 years I’ve been filing returns, I’ve never seen or heard of income verification hiccups at the IRS.

W2s are the most verifiable income because 99.9% of them are done by payroll services that have been designed to be 99.9% accurate. 1099-MISC are less reliable because half, if not most, are not done by payroll services. In fact, A good portion of 10999-MISCs are handwritten so its possible the employer forgot to mail their 1099s. 

However, my clients didn’t have any 1099s so their income should’ve been 100% verifiable - and refunded - in the standard amount of time. These are the things I had in mind when I asked that question.

Also note that IRS doesn’t get W2s directly. They are fed W2 information directly by Social Security Administration. So did SSA and/or IRS get a new system/and or bug that’s suddenly causing miscommunication between them? The agent’s response didn’t sit well with me. She said there were no issues with communications with the SSA and that employers could simply have failed to file W2s and 1099s.

That made no sense. Unfiled 1099s are very much possible, but unfiled W2s are very rare. It is much more likely that W2s are filed late, rather than not filed at all. The deadline for filing W2s is Janurary 31st. I believe W2s would have been filed no later than the end of February, maybe early March. Even that is rare. What’s more common is that W2s are filed before the deadline, on the deadline, and 15 days after. I spoke to the IRS this April, after tax season. I really doubt payroll services have not done their jobs which means my clients’ return, again, should’ve been refunded by the time of my call.

My conclusion is that IRS is heavily scrutinizing returns EIC returns in order to find holes in taxpayers’ eligibility to claim it, and not really to "verify income". I suspect EIC as the culprit and not other refundable credits because all returns that have no EIC but have other refundable credits such as American Opportunity Credit, Lifetime Education credit, Child Tax Credit, were all refunded in the standard processing time. All the returns that were held back had EIC.

The IRS can find holes in taxpayers’ eligibility for EIC in several ways: 

1. The child’s social security was registered to another child,

2. The child’s social security doesn’t reflect that of a US Citizen’s,

3. The child is previously claimed by another taxpayer in prior years and/or the claimant isn’t a parent and the tax preparer didn’t make a note of a parental release by the parents,

4. The child’s parents were not claimed by the parent making higher income if the parents are married and filed separately,

5. The parents are married, they filed separately, and the parent who claimed the child claimed head of household in order to get a higher refund. 

These are just 5 of the numerous examples where EIC could be denied. Look out for a later blog detailing all the reasons for EIC denial. It’s my believe that IRS is looking to find reasons to disqualify people from EIC claims. Depending on what they find while conducting their "review", refund for delayed returns can take an unpredictable amount of time. And this is what I’ve seen. Since I started seeing delays in 2017, the delayed returns have been released at very different times, with no rhyme or reason.

I have another jarring theory. The other curious aspect of this is that these changes started after Trump has been in office for some time and had time to implement his policies. This could mean IRS is scrutinizing returns to ferret out illegal immigrants (and even legal immigrants) who are taking “government handouts”. This will mean IRS is acting as a conduit to Immigration and Customs Enforcement (ICE). Of course I have no proof of this theory, but we’ve seen some crazy things from this administration.

If you are experiencing a delay in receiving your tax refund, here’s what to do: 

1. Determine how long ago your return was filed and call IRS only after the standard processing time has passed: 

1. If you e-filed call only after 21 days or 

2. If you paper filed, wait over 6 weeks.   

2. Call IRS at this number: 1-800-829-1040. If your return was filed less than the times above, don’t waste your time calling IRS, they can’t or won’t help you.   

3. Select option 3. This IRS line is deeply, deeply automated and after calling several times, I found only option 3 led to a live agent. If you clicked the option for the refund status, it too is automated and will only tell you what you already know about your refund delay-it is delayed.   

4. On the next menu, press option 3 again. This will connect you to the operator who should come to the phone pretty quickly. Simply tell him/her that you need the live researching of why you haven’t received your refunds. He/she should then transfer you to a live line. On this line, be prepared to wait a long while. 

5. You should use your wait time to have your tax return ready.

6. When the agent comes to the phone, tell them your story, verify your account and go form there. 

Have you been experiencing delays in your refund in thee past two years? For longer than that? Comment below, let us know. 

Contact us if you need help.