Debt Ceiling Fix Eases Fears On Tax Refund Delays

Rest easy, folks: your tax refunds are safe.

Despite dire warnings that tax refund delays could happen if Congress didn’t address the debt ceiling crisis (the same worries we had last year), we don’t have anything to worry about for 2014. Well, at least not as it relates to refunds and the debt ceiling.

In a show of bipartisan cooperation (no, you didn’t read that wrong), a number of Republican Senators, including Senate Minority Leader Mitch McConnell (R-KY) crossed the aisle to overcome a filibuster attempt by – who else? – Sen. Ted Cruz (R-TX). Sen. Cruz had hoped to stall a vote on the debt ceiling. Eventually, Republicans and Democrats garnered enough votes (67) to break the filibuster. All 55 Democrats voted against the filibuster together with 12 Republicans. Those Republican Senators who dared to cross Sen. Cruz are considered some of the most powerful in the Senate and included, in addition to Sen. McConnell (R-KY), Sen. John Cornyn (R-TX), Sen. Orrin Hatch (R-UT) and Sen. John McCain (R-AZ). You see the entire roll call here.

Eventually, Congress did approve a measure to raise the debt ceiling temporarily – with no strings attached. That marked the first time a so-called “clean” debt ceiling raise had been passed in nearly five years. The vote was completely along party lines, with a final tally of 55-43.

That means we should have enough money to pay the government’s bills in February – important for taxpayers expecting a refund since statistically most refunds are issued in February. Last year, the government issued checks worth about $157.59 billion before March 1 to cover taxpayer refunds. That’s about half of all refund dollars: the IRS delivered a total of 109,563,000 refunds in all of 2013 for a total of $301.863 billion.

Without any action from Congress, the government would have hit the debt ceiling by late February (letter from Treasury Secretary Lew Jacob downloads as a pdf). That meant that we would have run out of money. The timing, once again, coincided – unhappily – with the bulk of income tax returns being filed requesting a refund.

It was a scenario that Secretary Jacob warned Congress about, noting that “the government experiences large net cash outflows in the month of February, due to tax refunds.” He also noted that 2014 would be an especially tough year for the concentrated volume of tax refunds “in the weeks after February 7 due to the delayed start of the tax filing season, which was caused by the government shutdown.”

So what would have happened to all of those tax refunds? They likely would have been held. Under the Tax Code, there’s no magic date for issuing refunds. While the Internal Revenue Service does their best to get refunds out for most taxpayers in 21 days (they claim that 9 of 10 taxpayers who e-file get refunds by that time), there’s no law that requires IRS to get refunds out in 21 days. Or 30 days. Or 100 days.

In fact, the only related statutory requirement can be found at 26 U.S. Code § 6611 (e)(1) which states:

If any overpayment of tax imposed by this title is refunded within 45 days after the last day prescribed for filing the return of such tax (determined without regard to any extension of time for filing the return) or, in the case of a return filed after such last date, is refunded within 45 days after the date the return is filed, no interest shall be allowed under subsection (a) on such overpayment.

In other words, the IRS has to pay you interest on a “late” refund but that interest doesn’t start ticking until 45 days after the return is filed. But there’s nothing that says IRS has to pay you by that time. They could, in theory, push it out for a bit – similar to what happened to taxpayers in North Carolina and in California in 2010. Realistically, I can’t imagine that happening on a federal level: it would be political suicide.

Of course, the cycle is such that funds will land in the Treasury eventually. Since the government doesn’t keep a stash of money under the mattress to pay tax refunds, it pays its obligations – including tax refunds – with new revenues from tax dollars and bond sales. Tax dollars are likely to hit in March and April though Jacob advised that the headroom for bond sales and other money that could be freed up is limited. By pushing the debt limit up temporarily, it gives the government some breathing room (we can borrow more money) until we hit the ceiling again.

How much breathing room? The act suspends the debt limit ceiling until March 15, 2015. So, we’ll have this discussion again next tax season. Until then, happy refunding.

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Kelly Phillips Erb
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Source: Forbes Business

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