Tax Note: Look Ahead to Delays in 2016
by Chris Van Meter, M.B.A., E.A.
For some of our clients, 2015 was a most annoying and frustrating tax year, as new security procedures and the labyrinthine tax-reporting requirements of the Affordable Care Act slowed down and in some cases substantially delayed the processing of their tax refunds. Unfortunately, it looks like the situation will be even worse in 2016.
To begin, the Treasury may have incurred losses of as much as $21 billion last year, as gangs of organized criminals filed enormous volumes of fraudulent tax returns using stolen identities. To clamp down on this, the IRS has begun to use new loss mitigation procedures to minimize the chances of paying out refunds on phony returns. Sadly, this means that thousands of honest, law-abiding citizens have had their returns flagged for special identification verification procedures that delayed refunds for weeks or in some cases months. In some cases, the IRS did not even notify the taxpayers that their returns had been set aside. Similarly, some people received paper checks rather than electronic funds transfers, again in an effort to minimize the chances of paying out fraudulent refunds.
The IRS is also responding to mandates by Congress to reduce the number of fraudulent Earned Income Credit (EIC) and Child Tax Credit claims that are paid out. By some government studies, as many as one in four EIC claims are incorrect or even fraudulent, costing the Treasury as much as $15.3 billion in just one recent tax year (2013). Beginning in tax year 2016, a new law will require the IRS to wait until Feb. 15 to send refunds to households receiving the earned-income tax credit and child tax credit. To give you an understanding of the impact of this new law, consider that by Feb. 12 of this year the IRS had already sent 29.2 million refunds totaling $94 billion. This new procedure will of course have a substantial impact on lower-income taxpayers.
Finally, 2016 is the year that more taxpayers will need to file returns that document the nature and extent of their household's health care coverage, using the Forms 1095-B and 1095-C that showed up in our mailboxes by way of preview over the winter and spring of this year. All of us will have to learn to navigate new tax forms, but our biggest concern is that taxpayers with adult children on their health insurance plans may experience unexpected difficulties in preparing their tax returns owing to the complexity of reporting one insurance policy on more than one tax return. Indeed, last year thousands of Americans who had marketplace insurance reported on the Form 1095-A for some or all of the year had their returns subjected to extra scrutiny and adjustment because of problems allocating health insurance coverage and premium tax credits between different taxpayers.
Sadly, there is no silver bullet for any of these potential situations other than to plan ahead. In particular, if you carry adult children on your health insurance, we strongly recommend that you coordinate with them in advance before anyone files a return. This is especially true if you participate in a marketplace insurance policy and received an advance premium tax credit to help offset your health insurance costs. As usual, if you have any questions or concerns, please call Chris or Dave at (315) 823-9200.