Slow state tax refunds upset filers

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By Bankrate

The Minnesota Department of Revenue warned its taxpayers back in January that new and increased measures to fight tax identity theft and refund fraud could slow their refunds.

They weren’t kidding. Two months later, folks in the Land of 10,000 Lakes are getting annoyed.

Anger growing over slow refunds

Personally, I’ve heard from some Minnesota taxpayers who are not happy with the wait. More have been heading to the Minnesota Department of Revenue Facebook page to register their complaints.

The consensus is that it’s unfair for state tax officials to hold on to the refunds when they certainly don’t allow such delays for taxpayers who owe taxes.

It sounds like there weren’t many Minnesotans in the recent Bankrate tax poll that found more than 70% of U.S. taxpayers would give the IRS more time to process returns in order to fight tax fraud.

Seriously, though, I understand the frustration, especially if you’re counting on the tax money to cover some necessary expenses. That’s what 27% of those surveyed by Bankrate said they would do with their federal refund money.

Lost state revenue to tax fraud

But I also get where Minnesota tax officials are coming from. Like Uncle Sam, states lose a lot of money every year to tax fraud.

Eventually, we all pay for that stolen tax money.

That’s why the Vermont Department of Taxes is just now getting around to distributing more than $16 million in refund claims.

The Green Mountain State held the money in February as it waited for more employer W-2 forms and other information against which the returns, and their delayed refunds, could be checked for legitimacy.

More state security checks

While Minnesota’s taxpayers are more vocal about their delayed refunds, they are not alone.

Every state that collects some form of individual income tax — that’s 43 of them, along with the District of Columbia — is experiencing refund delays due to high levels of refund fraud this tax season.

States aren’t revealing what they’re doing to catch fraudulent refunds. “If you design a new key, you don’t want to put the blueprints out there,” Verenda Smith of the Federation of Tax Administrators told Tax Notes.

A check of state tax websites, however, reveals that in order to accept or process returns, many departments are asking their filers for state-issued driver’s license info or enhanced password requirements and security questions in connection with state-authorized tax preparation software. Some are even demanding that taxpayers whose returns raise questions complete a quiz to confirm their identity.

Security paying off

Anecdotally, the efforts to cut down on stolen identity refund fraud seem to be working.

Illinois, which finally began issuing its refunds on March 1, says fraud-prevention measures implemented last year saved nearly $5 million from going to tax criminals.

Even less populated states are seeing results from their tax fraud prevention efforts.

Montana tax officials say that so far this year, they have blocked 188 fraudulent returns seeking a total of $220,245 in refunds. Last year at this point in the filing season, Montana had blocked 529 fraudulent returns seeking nearly $583,000 in refunds.

But the states are paying a price in lost goodwill.

Taxpayers express frustration over tax departments never acknowledging receipt of their state tax returns, reports Tax Notes, or getting a busy signal when phoning state tax offices.

Have you gotten your state tax refund yet? If not, has your state explained why it’s delayed? Are you in tough financial straits because of the unexpected wait?

Paul S. Herman CPA, a tax expert for individuals and businesses, is the founder of Herman & Company, CPA’s PC in White Plains, New York.  He provides guidance and strategies to improve clients’ financial well-being.