Taxing Times for Americans as States Withhold Tax Refunds

As we’re all aware, this decade’s Great Recession has dealt, and continues to deal, a significant blow to the budgets of many American families, leaving millions in debt, underwater in their mortgages, and looking for any means necessary to get back on a financially-healthy course.  Now, we’re finding that tax time is also yielding it’s own set of challenges for some cash-strapped citizens and the struggling states who owe them.

Today, many cash-strapped states such as North Carolina, Alabama and Hawaii have delayed issuing income tax refunds to individuals and businesses; Kansas has suggested similar delays, while Iowa has slowed down the process because it doesn’t have enough employees to process the refunds more quickly.  Further, New York, has considered following the lead of its fellow states by stalling their own state income tax refunds.

“States typically do this when they are tight and they don’t have a budget in place,” Karla Dennis, CEO of Cohesive, a nationwide tax preparation firm, recently told CNBC.  As the business network reported, “things are dire at many states: forty-one states are expected to have mid-year budget gaps totaling $37.7 billion, according to the Center on Budget and Policy Priorities. Delaying the refund, Dennis says, ‘gives the state funds to work with in the interim to fill a gap in their revenues.’”

While some may question the legality of holding taxpayer dollars, these delays appear to be above board—at least for now.  As CNBC noted, “Hawaii’s Department of Taxation announced last month that it will delay income tax refunds until July 1, when processing and payments will resume on a “first-in-first-out basis,” according to a news release. The state is delaying the funds to alleviate a $721 million revenue shortfall for the fiscal year ending June 30, 2010. Under Hawaiian law, processing refunds must be done 90 days after the April 20 due day (or later if a return is filed after the due date). After that, the actual payment must be made within 45 days or interest has to be paid on the refund. Most states have similar laws about when interest kicks in, but they differ from state to state, said Scott Clark a tax attorney and partner at Sonnenschein Nath & Rosenthal.”

Unfortunately, North Carolina citizens face a similar situation. “The state’s Department of Revenue posted a note on its website stating that the ‘state continues to feel the effects of the slow economy, and the department is managing the distribution of refunds as a result.’”

This is the second time in as many years that North Carolinians have suffered the ‘wait and see’ for their state refunds. “Refund payments were slow to be processed in North Carolina last year too, the only difference now is that the department is keeping mum on when taxpayers might expect to receive their refunds. Last year, deadlines weren’t met. ‘We ended up not being right and people got even more upset,’ said Thomas Beam, a spokesperson at the North Carolina’s Department of Revenue. He says besides managing funds, other factors—such as wrong addresses, social security numbers or not attaching the right forms—can further slow down payments. The state continues to release refunds at a slower pace, and updates how much they’ve processed on the site regularly. As of late February, 727,282 refunds were processed in North Carolina totaling over $500 million.”

Experts say that more states may follow suit in delaying state income tax refunds as it becomes more and more clear—with little in their coffers—that they have little other recourse but told hold back. This is little solace for families facing financial struggles and dependent on this annual economic infusion.  “It’s essentially an involuntary no interest loan from the taxpayer,” Ivan Kenneally, an assistant professor of political science at the Rochester Institute of Technology told CNBC.

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