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Why you might have to wait for your tax refund

January 31, 2007 | In tax refund |

Sorry, your tax refund has been delayed
Several deductions that Congress renewed at the last minute won’t be mentioned on this year’s tax forms. For taxpayers, that may mean extra work and delays in their checks from the IRS.

Some taxpayers who file their returns early this year might be disappointed in how long it takes to get their refunds. The Internal Revenue Service says the processing of around a million returns, along with the issuance of any refund checks, could be slowed because of tax-form complications.

You’re most in danger of a delayed IRS check if you plan to take the state sales tax, educator expenses, or tuition and fees deductions, regardless of whether you claim just one or all three. This tax-break trio was signed into law in late 2006.

But don’t blame just the IRS. Congress played a big part in creating the problem because it was slow to put the popular breaks back on the books. The deductions technically expired at the end of 2005. It took Congress almost a full year to reinstate them.

That delay is why you might encounter refund delays. But the IRS offers a couple of solutions. Filing electronically may be the answer. But for taxpayers with a penchant for filing paper forms, follow the instructions below to sort out the sales tax or make education-related adjustments.

You must express the amounts you report on your U.S. tax return in U.S. dollars. If you receive all or part of your income or pay some or all of your expenses in foreign currency, you must translate the foreign currency into U.S. dollars through an open currency exchange. How you do this depends on your functional currency. Your functional currency generally is the U.S. dollar unless you are required to use the currency of a foreign country.

What might go wrong
While Capitol Hill was wrangling over the renewals, the IRS pushed ahead in readying 2006 tax material. To ensure that the current filing season would start on time, the IRS had to get forms to its printer in November, about six weeks before the final tax-break vote.

Because there was no guarantee that Congress would extend the expired deductions, any mention of them was omitted from the final forms. So now taxpayers and IRS employees alike must deal with “special instructions” to claim the deductions missing from this year’s returns.

The IRS expects some filers to make mistakes entering the claims on form lines that are already designated for other tax breaks.

In announcing the makeshift deduction process, IRS Commissioner Mark W. Everson said, “The recent changes in the law mean the IRS will not be able to process a small percentage of (these) individual tax returns until early February.”

In January 2005, the IRS received around 930,000 returns that included claims for at least one of the three extended tax breaks. The tax agency is estimating it will get, and have to hold for a few extra weeks, a similar number this year.

How to avoid problems
One way to bypass this season’s form complications is to use tax software. Most of the products were issued in a preliminary format months ago, with instructions to periodically check the manufacturers’ Web sites for updated information and forms.

“This has had a lot of attention, but over the years there have been changes that came in after the program was in stores,” says Julie Miller, a spokeswoman for Intuit, the maker of TurboTax. “Even when there isn’t (last-minute) legislation, every year some federal forms are not ready when filing season kicks off. And we’ve had lots of practice with state tax forms that typically come in later than federal tax forms, sometimes not until late January.”

Intended to ensure the rich pay their share, this tax hits more Americans each year. Are you one?

But this year’s form situation has prompted the tax-software giant to make one change. “Unique this year is a hard stop in the program before you print or e-file to make sure that all your forms are updated,” Miller says.

The procedure is similar at 2nd Story Software, maker of TaxACT. “Regardless of whether a taxpayer is using a preview product to forecast a tax amount due or a refund or is using a final product, they can use the update feature,” says Stephanie Behrends, the communications manager for the Cedar Rapids, Iowa, company.

If customers of either tax product use the online versions, updates that include the three extended provisions will be automatic. That’s also the case for the Free File program, the IRS tax-software collaboration that’s available to taxpayers with adjusted gross incomes of $52,000 or less.

In announcing the alternate deduction guidelines, the IRS is encouraging filers to use Free File or other electronic avenues to “minimize confusion over the late changes and reduce the chance of making extender-related errors on their returns.” E-filing makes the jobs of IRS processors easier, too.

But about half of all taxpayers — and the IRS is expecting a total of 136 million returns this year — still file the old-fashioned way, filling in paper forms and snail-mailing them. These filers will have a bit of extra work to correctly enter the extended tax deductions on now-outdated forms.

Keys to sorting out the sales tax
If last year’s claims are any indication, around 11 million filers will look for where to enter the deduction for state sales taxes. That deduction is available to residents of the nine states without income taxes of their own.

Though the IRS opted to omit the sales-tax break on its individual return forms, the agency took a chance that it would be renewed and put together Publication 600. This booklet contains instructions and tables of applicable sales-tax deduction amounts based on a filer’s place of residence and filing status. Instead of tallying up a year’s worth of separate receipts, taxpayers can simply claim the appropriate table amount. The document is available on the IRS Web site.

Once you find the sales-tax amount to claim, the next step is to find out just where to enter it. Because you must itemize to claim the sales-tax deduction, you’ll enter the amount on line 5 of Schedule A, listed as “State and local income taxes.” Enter “ST” on the dotted line next to the amount to indicate you’re taking the general sales-tax deduction.

How to take education write-offs
The other two revived write-offs are available regardless of whether you itemize or take the standard deduction. The only requirement is that you file the long Form 1040, as the breaks are not available this year on the 1040A form.

To claim the higher education tuition and fees adjustment, which could reduce your taxable income by as much as $4,000, enter the amount on line 35. That line is officially labeled “domestic production activities deduction,” a tax break for U.S.-based businesses that manufacture products domestically instead of sending the work overseas.

If you use it, however, for tuition and fees, write “T” on the corresponding dotted line. If you are also taking the domestic-production deduction, put the combined amount on line 35 and write “B” on the dotted line. You’ll also need to attach a paper showing the breakdown of the amounts claimed for each deduction.

Intended to ensure the rich pay their share, this tax hits more Americans each year. Are you one?The educator-expense adjustment allows a tax break of up to $250 to teachers and other eligible school (public or private) employees who spend their own money on classroom supplies. Enter the amount on Form 1040, line 23, which is designated for “Archer MSA Deduction” claims, and write “E” on the dotted line.

If you’re claiming both an Archer medical-savings deduction and the educator expenses, the drill is the same as with the tuition and fees adjustment. Write “B” on the dotted line and attach a breakdown showing the amounts claimed for each.

For each of these tax breaks, the IRS has placed examples of where and what to enter on the 2006 forms: sales tax, tuition and fees and educator expenses.