On Friday, the President and Congress failed to reach an agreement to stave off the start of automatic federal spending cuts. Commonly referred to as sequestration, the spending cuts total approximately $1.2 trillion over the next 10 years.
In the short term, this means that thousands of federal and state programs that receive federal funds will see their available budgets decrease. These spending cuts come at a time when many state and city governments are already see budget shortfalls even with previous funding from the federal government.
For the average person in the United States, the spending cuts in general will have little direct impact in the coming months. But there is one possible exception looming to this: tax refunds.
The spending cuts that went into effect on Friday included an immediate over 8% decrease in funding to the IRS. Initial reports indicate this will mean the IRS will have to release additional workers they normally have on staff during tax season to more quickly process that returns.
According to Floyd Williams, senior tax counsel at Public Strategies Washington, the IRS can compartmentalize normal budget cuts, meaning they can choose to make the cuts in less critical areas of their organization. But the forced spending cuts in this case have to be taken across all departments, which gives the IRS less ability to move around staffing.
“They won’t be able to move people or have more people helping with refunds,” Williams said. “The IRS has had cuts over the past couple of years and is working on Continuing Resolutions. So any reduction will cause some problem for them.”
According to David Selig, a tax practitioner with Selig & Associates, the spending cuts come during a time when the IRS was already behind on processing returns because of the tax law changes made in January to address the fiscal cliff. The IRS is still working to ensure all of their systems have been updated to properly reflect those relatively last-minute tax law changes.
“Unless a deal is reached, the IRS will furlough the non-essential personnel, and a tax refund is not a high-priority matter,” Selig said. “They already aren’t up to speed due to the fiscal cliff, and these problems were complicated further by ObamaCare.”
The IRS might have considered extending the filing date for federal income tax beyond April 15. But as the federal government has already spend the expected federal income tax they will receive, they cannot allow the IRS to delay the completion of returns.
“The government has spent a great deal more than it should have, and it’s based on what they expect to receive in taxes. They haven’t pushed back the deadline and are already not equipped for handling many business returns and schedules.”
Normally taxpayers who are due a refund will receive that refund within 10 days when filing electronically or within 6 weeks when filing by mail. If the IRS does in fact have to release additional employees, they are anticipating it will add weeks to the normal time it takes to receive a refund.
In 2012, the average refund was just over $2,500.
“For the average family, that is real money,” Williams says. “A lot of people look at the tax system withholding as a forced savings, so they have come to count on that cash for a certain time each year. They use it for Christmas gifts, vacations, and some people need it for their utility and rent payments.”
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.