As many of you know, the IRS has been delayed in processing 2020 tax refunds.
Covid-19 and the IRS shutdown are largely to blame for this.
However, a recent update has confirmed that the IRS has flagged over 5.2 million tax refunds for identity fraud, and for these taxpayers, this means an even longer delay.
But there is some good news that could mean an even larger refund once your refund is processed.
And by the end of this post, you’ll understand what’s causing more tax refund delays.
We’ll also discuss how to know if your return was flagged for identity fraud, if you qualify for more money from the IRS, and tips for preventing tax refund delays due to identity fraud in the future.
If that sounds good, then let’s dive right in now.
What’s Causing More Tax Refund Delays
Why did the IRS has flagged over 5.2 million tax refunds?
The reason is tax fraud.
And more specifically, identity fraud.
There has been a 50% increase from 2019 in flagged tax refunds due to potential identity fraud.
Each and every year, any tax return that claims a refund is automatically run through a specific IRS system that is designed to detect fraudulent wage or identity theft-based claims.
This process has prevented over $2.5 billion in losses in 2019 by stopping refunds from getting in the wrong hands.
Unfortunately, a large portion of tax refunds being flagged for identity fraud is not actually fraudulent.
And this issue was compounded even more in 2020.
Especially since the IRS notifies taxpayers of refund concerns via mail and both sending and processing taxpayer letters were delayed last year.
How To Know If Your Refund Was Flagged for Identity Fraud
The IRS will mail you a letter if your refund is flagged. And it will either be a 5071C or 6331C notice.
The IRS sends these types of letters as an attempt to clear up the flags on your refund.
Basically, they want to make sure that there isn’t some criminal out there stealing your refund.
Keep in mind that the IRS will not issue a refund until you respond to their letter.
So if you recently moved and haven’t gotten your refund yet, it’s possible that they sent you a letter and are waiting for your response.
If you did receive a letter regarding a delayed refund due to identity fraud, the IRS letter will describe how you can verify your identity.
In many cases, you will be given the option to verify your identity online at irs.gov using Secure Access.
The process of setting up Secure Access takes about 15 minutes.
But once you do, you’ll be able to access your IRS account online and perform different activities like verifying your identity with them.
If you’re unable to access your online account, then you would need to call the IRS directly and the agent may be able to verify your identity over the phone.
Worst case scenario, you may have to schedule an appointment at an IRS office and you can do so by calling this number 844-545-5640.
Now it’s time for the good news.
Interest On Your Tax Refund
If you expect to receive a refund but have been waiting longer than 45 days after the filing deadline, by law, the IRS is required to pay you interest on your refund.
Just as taxpayers are required to pay interest on outstanding tax debts they owe the IRS…
…that same rule applies to the IRS when they are late on the money they owe you.
Just last year, when the Internal Revenue Service distributed tax refunds, it paid $3 billion in interest owed to taxpayers on top of their refunds.
Now, this only applies to individual taxpayers.
So if you’re a business taxpayer and your business is due for a refund, don’t expect an additional interest payment from the IRS.
So how much will you receive in interest on your refund?
Interest is paid at the legally prescribed rate and is adjusted quarterly. But in general, it is between 3 and 5 percent.
The current interest rate for refunds is at 3 percent.
But there’s always a catch though, right?
You got that right, the interest payment that you receive from the IRS is considered taxable income.
This means next year when you file your taxes, you’ll have to include this on your return.
If you receive more than $10 in interest payments, the IRS will send you a tax form called 1099-INT. INT is for interest.
You would use the information on this form to include on your tax return.
Tax Refund Delays: Tips For Preventing Fraud On Your Refund
So how can you avoid your return getting flagged for tax fraud? Here are a few tips:
1. File your tax return early in the tax season.
This is so fraudsters don’t attempt to do this before you and possibly get your refund.
2. File electronically over a secure internet connection.
Never do so using public, unsecured networks.
3. Be responsive to IRS letters.
This is because the IRS may be trying to verify your identity.
4. Remember that the IRS will never contact you via email, text, or social media.
They will always contact you first by mail. Phone calls do happen but rarely, and you will receive several mail notices first.
5. Thoroughly vet your tax preparer before giving them your personal information.
Also, be cautious with those who are guaranteeing you a really large refund.
6. Consider adjusting your withholdings at your job.
This is so less taxes are taken out, and you get to keep more of your money on the front end.
By doing this, you’d be owed a lower refund and if you are a victim of tax fraud, less money is at stake. Fraudsters are also less likely to go after lower refund returns.
If you do think you may be a victim of tax fraud, the IRS has laid out specific steps of what to do on their website, or you can call this number: 800-908-4490.
And in case you need any help with your taxes, our team of LYFE tax experts is here to assist you.
We offer tax planning, tax preparation, and tax resolution services. Simply get in touch with us today!