Red Tape - IRS snafu leaves taxpayers, refunds in limbo for months

IRS snafu leaves taxpayers, refunds in limbo for months
By Bob Sullivan

It's perhaps the very definition of Red Tape. Four years ago, Congress decided that the IRS should get into the banking business, authorizing it to give out no-interest loans to first-time homebuyers. That put the agency in the position of both collecting loan payments and issuing tax refunds to the roughly 1 million taxpayers who took advantage of the program.

This year, the odd arrangement overwhelmed IRS systems, and an unspecified number of taxpayers have been forced to wait four months or more for their tax refunds. In fact, many are still waiting.

"This is frustrating for taxpayers, and it's frustrating for us," said IRS spokesman Terry Lemons. "We deeply apologize."

Making matters worse, taxpayers caught up in the vortex say they've been promised delivery dates for their refunds repeatedly, only to be disappointed or to discover their returns have been placed back into "error" status.

One of those taxpayers who's been tantalized by repeated promises of a refund check is Tia Littlejohn, who lives in Maryland just outside Washington, D.C. She and her husband are planning to use their expected $6,800 refund to pay for in vitro fertilization. She's had to postpone the procedure twice because promised tax refund dates have come and gone without payment.

"At this point, I may have to just cancel it," she said. "It's really affecting our household. It's very stressful."

Her litany of hope and disappointment is typical.

"Our return was processed February 19 with a refund date of March 4. Well, March 4 came and went. Since then we have been waiting, every other week we have a different error code and the date of a possible direct deposit," she said. "On April 27 they told me they told me my return was done and 'out of error.' Last week they told me I should receive it May 20. Then (Wednesday) I looked and it's gone back into error again."

Lemons said the IRS has devoted a lot of extra labor toward solving the problem and began manually processing the returns after the problem was discovered in February. The number of victims has been whittled to "a few thousand taxpayers," he said.

More on the First Time Homebuyer tax credit

That's cold comfort to people who have been waiting months for thousands of dollars. A Facebook group devoted to taxpayers caught up in the mess now has more than 3,000 members; they write daily about their mind-numbing frustrations. Many are now being told their returns won't arrive until mid-June.

"I had a date, and a second date ... and now I'm back at 1201 (error). My advocate said that it's just sitting there. WTF IRS?" Jannae Leonard Powell wrote Thursday.

The Facebook page has become a support group for some, a place where taxpayers share tips on the best time to call , the best number to call and how to reach the most helpful phone agents. Littlejohn said many in the group have received frequent rude treatment, so they just hang up repeatedly until a "nice" agent answers.

"Some are very nice, but some are very nasty and basically say, 'I don't know what else to tell you. You are just going have to wait,'" she said.

All the taxpayers involved in the glitch took advantage of a one-time, misnamed First Time Homebuyer tax “credit” offered during the 2008 tax year, a program that turned out to be a meager effort by Congress to prop up the then-imploding housing market. Homebuyers who took advantage didn't actually receive a credit — they were granted what was essentially an interest-free loan of up to $7,500, to be paid back in $500 increments starting in 2010. Subsequent versions of the program granted homebuyers an outright tax credit, so the 2008 users already have something to moan about.

Lemons said IRS systems weren't set up to handle the many variables that ultimately came from the program, such as how to calculate repayment of the loans if buyers got divorced, or ended up in foreclosure. One particularly vexing and unexpected problem: Many taxpayers are paying more than the minimum $500 annual payment in an effort to pay off the loan early.

"That has complicated matters," he said. "These are well-intentioned homeowners, but our initial programming was that payments would be spread out equally over 15 years." Programmers of complex systems will understand this as a typical problem of "unexpected input."

Stephanie Vega used the tax break loan to buy a house in 2008 and accommodate her growing family shortly after she had twins. The family bought a foreclosure property that needed major cosmetic repair at the time — and still does. They planned to use this year's refund to repair their master bathroom, which has been essentially unusable since the purchase.

"When I called at the end of March, they said they were going to get everyone who was affected by this their money by April 5th," Vega said. "That came and went, and obviously no money. … They all contradict what the one before them say. You just don't know who to believe."

Vega, like many of the other taxpayers, has been assigned an agent in the IRS Taxpayer Advocate's Office, but she said that hasn't helped much.

"Normally, I am not a pushy person, and so usually I just sit back and wait. I don't like to be a pain or a bother, but we are needing our money now," Vega said. "I just feel like the complete lack of communication, along with the IRS seemingly just sweeping this problem under the rug, is so unfair and unjust."

Amy Royer, 37, had to wait more than three months, but she just received her $4,700 refund last Friday. Even so, she still feels angry about her interactions with the IRS.

"The whole thing was a pretty bad experience," she said. "Most of the frustration came because of the inconsistency, the different stories we got about the status of our refunds. It was a fiasco, really."

Royer had also planned to use her refund to take care of a medical procedure. Because she was promised a refund on March 8, she went ahead with sinus surgery on March 1 and paid with credit, assuming the refund money would arrive and cover the bill. The refund's tardiness caused her to pay high interest and set her blood boiling.

"The whole time, I was saying, 'I would have a different feeling about things if we were getting real answers,'" she said. "It's our money, not their money."

With the problem having shrunk to a few thousand taxpayers, it might be hard to understand why the IRS hasn't been able to manually overcome its computer issues and issue refunds. Lemons said that the agency is trying but that the problem arose at the worst possible time.

"This time of year, we have tens of millions of tax returns coming in. It's all hitting at the busiest time of year," he said. "Our people have been hustling for weeks to get this thing squared away, but the bottom line is there are people who have not gotten refunds yet, and we deeply apologize."

RED TAPE WRESTLING TIPS

Many consumers enjoy the rush of a large tax refund check and use their regular payroll deductions as a kind of forced savings plan. That's a bad idea.

This Red Tape tale is a good reminder to all that now is a good time to double-check your regular payroll deduction. There is no good reason to overpay federal taxes during the year in order to build up a large tax refund. That amounts to no-interest loan to the government, and you are better off keeping that money throughout the year and putting it in the bank yourself. Obviously, it's better for you to receive the interest, rather than Uncle Sam. But perhaps more important, in an economy where even Standard & Poor's is beginning to doubt Washington's ability to pay its bills and where the federal government faces threatened work shutdowns annually, it's bad to trust your money to the whim of Uncle Sam. In the past, state governments have delayed issuing refunds to help close budget gaps — it's not unthinkable that Congress could try that someday.

If you received a large refund this year, that's nothing to celebrate. You should adjust your payroll withholding accordingly, ASAP.