Why Your Small Business May Experience a Tax Refund Delay—and How to Avoid It Next Year
April 18, 2017
The tax deadline is here. In case you don’t receive your return in the next few weeks, here are 5 reasons why.
It’s a fact: People despise waiting. In 2012, Timex asked people how long they were willing to wait before their patience timers ran out. The shortest wait was for coffee at seven minutes. The longest was reluctantly watching sports on the weekend. People were willing to wait nearly two hours before they changed the channel or left the room for that one.
Unfortunately, the wait time for a tax refund wasn’t included in the Timex study. Like it or not, most people wait around three weeks for a tax refund, but errors, oversights, identity theft or claiming certain refundable credits can lead to even longer delays. Today, graced by the April 18th deadline, we wanted to find out what causes these delays and what can you do to avoid them next year.
Reason #1: Your Tax Submission is Missing Information or Has Errors
Missing or incorrect information is one of the most common causes of delayed refunds. Be sure to double check Social Security numbers and make sure your name (and the name of your spouse and dependents) matches the name on file with the Social Security Administration.
If you file Form 1065 or Form 1120-S for your business, ensure the partner/shareholder names and Social Security numbers shown on the K-1s are correct, and the company name matches the name on file with the IRS.
Failing to report all income can also cause delays, so make sure you include all income from W-2s, K-1s, 1099s, etc.
If at all possible, have your refund direct deposited. The IRS says they issue more than 9 out of 10 direct deposited refunds in less than 21 days. Whether you file your return electronically or on paper, direct depositing your refund is faster than waiting for a paper check. Just make sure you double check the bank routing number and account number. If you enter the wrong account number and your refund gets deposited into someone else’s account, you’ll need to work with the bank to recover your money.
Reason #2: You Filed a Paper Return
The IRS strongly encourages all taxpayers to e-file returns. The tax software you use to e-file your return helps avoid mistakes from incorrect names or Social Security numbers, as the system will usually reject an e-filed return with those issues.
Because there is no waiting on mail or processing of paper, you’ll usually receive your refund much faster.
If you must file a paper return, be sure to attach copies of any W-2s or 1099s that include federal tax withholding. Failure to attach those forms to a paper return will result in processing delays.
Reason #3: Your Estimated Payments Applied to the Wrong Account
Once, I worked with a client who set up a single-member LLC for her consulting business and obtained a Tax ID number for the business. All smart moves, except when she made her quarterly estimated payments, she used the Tax ID number for her business instead of her Social Security number. The IRS had over $100,000 of her estimated tax payments, but because the payments had been applied to the business’ Tax ID instead of her SSN, they were sending her notices telling her she owed more money!
Fortunately, the issue was easily resolved with a letter to the IRS explaining the situation, but it did cause some frustration and delay.
If your business is an S-Corp, LLC, Partnership or Sole Proprietorship, income from the business “flows through” to your individual income tax return, Form 1040. When you make estimated payments, they should be applied toward your SSN, not the business’s Tax ID.
Missing or incorrect information is one of the most common causes of delayed refunds.
If payments were applied incorrectly, the IRS will send a notice indicating the amount of estimated payments reported on your return does not match their records.
Reason #4: You May Be Claiming Certain Refundable Tax Credits
If you claim the Earned Income Tax Credit or the Additional Child Tax Credit, your 2016 tax refund may take longer. A new law requires the IRS to hold refunds on any tax returns claiming these refunds until mid-February. This change was designed to give the IRS more time to help detect and prevent fraud.
Both of these tax credits are refundable, meaning taxpayers can receive refunds in excess of the amount of tax they paid into the system. While they are designed to help low-income taxpayers, the refundable nature of these credits makes them more prone to abuse and fraud. The new law mandates that no refunds for overpayments will be issued before February 15 if you claim the Earned Income Tax Credit or the Additional Child Tax Credit.
Reason #5: You May Be Flagged for Identity Theft
Identity theft has been a significant (and growing) problem over the last several years. The IRS is stepping up efforts to combat identity theft and tax refund fraud. Unfortunately, that may mean some delays even for legitimate refunds. Additional safeguards going into effect in the coming year may mean your refund takes a little longer to process.
If you have been a victim of identity theft and tried to e-file your return, you may get an error message stating a return has already been filed using your Social Security number. Double check the number to make sure it wasn’t entered incorrectly. If not, you’ll have to file a paper return and attach an Identity Theft Affidavit, Form 14039. Unfortunately, your return and refund may take months to process.
Taxpayers who were impacted by identity theft last year will receive an Identity Protection PIN (IP PIN). This is a six-digit number that must be included on your return to e-file this year. If you paper file your return and your IP PIN is missing or incorrect, the IRS will delay processing your return until they can confirm it actually came from you.
Can’t Afford to Wait?
If you really don’t want to wait for a refund, you may be able to adjust your withholding or reduce your fourth quarter estimated tax payment for 2016. If you can come up with a close estimate of your tax liability now, reducing your withholding or estimated payment will keep more money in your pocket now, so you’ll have a smaller refund later.
If the IRS doesn’t issue your refund within 45 days of accepting your return, they owe you interest for each additional day. The clock starts ticking on the April 18th deadline or the date you filed, whichever is later. If you are eligible for interest, the IRS will automatically add any interest it owes you to your tax refund. Just keep in mind that interest is taxable income for you on next year’s return.
Despite delays due to refundable tax credits and identity theft, the IRS says most tax refunds will still be issued in under 21 days. While some say a watched pot never boils, you can always check the status of your refund using the IRS’s Where’s My Refund? tool or the IRS2Go mobile app.
about the author
Forbes, Parachute by Mapquest, Capitalist Review, Guyvorce, BonBon Break and Kard Talk. Janet lives in Arizona with her husband and son and their rescue dog, Dexter. Outside of work and family time, she enjoys cooking, reading historical fiction and binge-watching Real Housewives.Janet Berry-Johnson is a CPA and a freelance writer with a background in accounting and insurance. Her writing has appeared in