Collection Executives Need to Enter This Tax Season with a Great Deal of Caution

Many companies in the collection business rely on consumers receiving their tax refunds on time to make payments on their debts. For some, the “income tax-filing season” generates the vast majority of their revenues for the year. Up until this past Monday, there was a major concern that the Internal Revenue Service (IRS) would delay processing tax returns due to the government shut down, delaying the start of tax season until after the shutdown ends. That does not appear to be the case. However, as those who service the U.S. Department of Education can attest, the only certainty is lack of certainty when it comes to the Federal Government and, in spite of recent articles that the tax season is “on schedule,” executives should enter this tax season with a great deal of caution.

On Monday, January 7, the White House directed the IRS to pay tax refunds to millions of Americans during the federal shutdown. Specifically, the White House stated that it is legal for the IRS to process and pay out tax refunds; however, it may not be particularly effective – at least not to the same level as in prior, normal tax seasons. There are two reasons for this.

First, as long as the shutdown ensues, the IRS employees actually processing the tax refunds and doing all the work behind the scenes CAN’T get paid. Whether or not IRS workers actually come in to work, change jobs, or slow things down is yet to be seen. Since this shutdown began on December 22, the IRS has sent home 90 percent of its staff without pay, something that was scheduled to continue indefinitely until Congress appropriated new funds. Tax refunds aren’t paid with money appropriated by Congress, but the workers who process the refunds are. Tax refunds have stalled during past shutdowns because there were no workers to process them and the IRS employees who are brought back in the coming days to handle tax refunds -- approximately half of the IRS workhorse according to a contingency plan issued on January 15  -- will not be paid until this shutdown ends.

Second, the Treasury Department has interpreted protecting life and property as the one exception to a government shutdown. Payments such as Social Security, for example, continued in past shutdowns. IRS tax refunds, however, are not seen as fulfilling this interpretation and therefore may violate the Antideficiency Act. According to a recent article in the Wall Street Journal, “At the extreme, government workers could face administrative penalties or criminal charges for performing activities for which Congress hasn't provided money. He said no one has been prosecuted for this and that any attempt to enforce the law would likely have to come from a future administration.” However, because the Trump administration lawyers ruled Monday that the refunds could be processed, it is highly unlikely that litigation will occur.

Most years, collectors look forward to tax season. This year, things may be a little different and we encourage owners and executives to factor these variables into their budgets and projections so they are able to operate profitably in the event of a slowdown.

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