April 7 (Bloomberg) -- The Internal Revenue Service will delay processing tax returns filed on paper if many government functions shut down April 8 because of the budget stalemate in Congress, potentially stalling refunds for millions of taxpayers.
A government shutdown will not affect processing of electronically filed returns, and it will not delay the April 18 deadline for individual income-tax filing, said Internal Revenue Service Commissioner Douglas Shulman.
“File your tax returns,” he said in response to questions yesterday at the National Press Club in Washington. “We’re going to be accepting returns. Electronically file. You’re not going to see any delay.”
Last year, according to the IRS, taxpayers filed 43.7 million income tax returns on paper, or about 31 percent of total returns. Through March 25 of this year, taxpayers had filed 11.2 million returns on paper. The total number of paper returns this year is likely to decline, because the electronic filing rate continues to increase.
Returns filed on paper tend to be concentrated at the end of the tax season. Last year, during the two weeks in April that correspond with the next two weeks, taxpayers filed 29.2 million returns, 46.2 percent of which were filed on paper.
Most individual taxpayers receive refunds, and the average refund so far this year is $2,952, according to the IRS.
Delays in issuing refunds won’t have a broad economic effect, said Lou Crandall, chief economist of Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in U.S. government finance. He said taxpayers who tend to spend more of their refunds file earlier so they can get the money quickly.
“The later you go, the percentage of refunds that gets recycled into consumption goes down,” he said.
Other IRS operations, including audits, will be curtailed or will cease during a government shutdown, an administration official who spoke on condition of anonymity said earlier yesterday.
As of late yesterday, IRS employees had not been told who should continue to report to work during a shutdown, said Colleen Kelley, president of the National Treasury Employees Union, which represents IRS workers.
“The unknown for employees is just very disconcerting,” she said.
As of Sept. 30, 2010, the IRS had 94,346 employees.
Shulman did not say whether the IRS would open paper returns and deposit checks contained in them into the Treasury. Last week, he told a House subcommittee that the agency’s old plan, developed during the 1990s, called for depositing checks and not processing the returns themselves.
“If they’re not going to open the returns and process the checks, they would run into the debt ceiling fairly quickly,” Crandall said. “It would be very surprising if they left more than $100 billion uncashed.”
The delay in processing paper returns would affect taxpayers who must file in that manner. That includes some claiming the first-time homebuyer credit or a tax credit for adoption that tops $13,000, said Kathy Pickering, executive director of the Tax Institute at H&R Block Inc., the country’s largest tax-preparation company, based in Kansas City, Missouri.
“It’s not a high population, but it is a substantial credit -- so for those who are able to take advantage of it, it’s a meaningful amount,” she said.
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