Cash-Strapped States Delay Paying Income-Tax Refunds

This year, more Americans and businesses may be asking: Where's my tax refund?

Tetra Images | Getty Images Cash-strapped states are delaying state income tax refund checks owed to taxpayers.

That’s because cash-strapped states such as North Carolina, Alabama and Hawaii have been forced to slow down issuing income tax refunds to individuals and businesses because of a lack of funds in their budget.

Kansas has hinted that a delay might be possible, and processing paper refunds in Iowa has slowed because the state doesn’t haven’t enough employees to get them processed faster.

Another state, New York, is still considering whether they’ll follow the likes of Hawaii and delay refund payments.

“States typically do this when they are tight and they don’t have a budget in place,” said Karla Dennis, CEO of Cohesive, a nationwide tax preparation firm. Things are dire at many states: forty-one states are expected to have mid-year budget gaps totaling $37.7 billion, according to the Center on Budget and Policy Priorities.

Delaying the refund, Dennis says, "gives the state funds to work with in the interim to fill a gap in their revenues."

Hawaii’s Department of Taxation announced last month that it will delay income tax refunds until July 1, when processing and payments will resume on a “first-in-first-out basis,” according to a news release. The state is delaying the funds to alleviate a $721 million revenue shortfall for the fiscal year ending June 30, 2010.

Under Hawaiian law, processing refunds must be done 90 days after the April 20 due day (or later if a return is filed after the due date).

After that, the actual payment must be made within 45 days or interest has to be paid on the refund. Most states have similar laws about when interest kicks in, but they differ from state to state, said Scott Clark a tax attorney and partner at Sonnenschein Nath & Rosenthal.

Something similar is happening in North Carolina. The state’s Department of Revenue posted a note on its website stating that the “state continues to feel the effects of the slow economy, and the department is managing the distribution of refunds as a result.”

Refund payments were slow to be processed in North Carolina last year too, the only different now is that the department is keeping mum on when taxpayers might expect to receive their refunds. Last year, deadlines weren’t met.

“We ended up not being right and people got even more upset,” said Thomas Beam, a spokesperson at the North Carolina’s Department of Revenue. He says besides managing funds, other factors—such as wrong addresses, social security numbers or not attaching the right forms—can further slow down payments.

The state continues to release refunds at a slower pace, and updates how much they’ve processed on the site regularly. As of late February, 727,282 refunds were processed in North Carolina totaling over $500 million.

Ivan Kenneally, an assistant professor of political science at the Rochester Institute of Technology, says that more states could join in delaying state income tax refunds as states realize they have little option.

“It’s essentially an involuntary no interest loan from the taxpayer,” Kenneally said. “Other states have done it in a noncommittal way. But in the meantime they’ve slowed down the process.”