As we enter the 4th quarter of the year, it is important to minimize or eliminate income tax refunds from the IRS, state, and city. You’ve likely heard that receiving a tax refund means that you gave an interest-free loan to these government entities. In addition, all of these government entities are becoming worse about paying income tax refunds back to you.
Each of these entities has tactics to deny, delay, and apply endless red tape to hold onto your money; and you have little recourse. The most common excuse, and they’ve all used this with me, is to claim, “We lost your return, could you send another one?” A few years ago, the state treasury kept claiming that they had lost my return, so I twice physically drove my income tax return to the state capital.
I had an unexpected credit just before the end of the last year, derailing all of my zero income-tax refund plans. I filed my taxes with my state electronically. After a month, I called them about the missing refund and their reply was (you’ll never guess), “Your return was lost somehow, could you re-send it?” Losing an electronic filing is not even a believable excuse. Anyhow, a month later, I call again to hear, “We’re having trouble with our system; just be patient.” A month later, I call again, “Ok, it just has to be approved, be patient.” Another 18 days later and the state income tax refund appeared. This was nearly 4 months after I filed electronically and made no mistakes. Note: the tax event that precipitated the refund was a mistake by the state to begin with – they withheld money they were obligated NOT to withhold.
There are many cities in my state that also have their own an additional city income tax. City income tax departments still process returns with paper for the most part, and are not known for efficiency or accuracy (the average city income tax refund takes 5 months to process). A nearby accountant made the news because: she was owed a city income-tax refund of $500 from the city where she worked. Instead, she received a bill for $5,296 in back taxes, interest, and penalties going back 12 years. Luckily, she had documents going back those 12 years to prove her innocence. Eventually, the accountant discovered that the city clerk doing her return was using the wrong social security number and the wrong marital status. But it took months, effort, and meeting several times with the clerk in person to resolve it. This experience prompted her to change jobs and move 30 minutes north of the city to avoid this problem in the future.
Through adjusting your income tax withholding with your employer, or adjusting your estimated tax payments, you can more accurately target — not over or under paying – all of your income taxes. Talk to your employer or accountant if you need it get it correct. It is a poor financial decision to hand a free loan to government entities, and now that income tax refunds of all kinds are routinely delayed and denied, there is even more reason to stop this bad money habit.