Some Cash-Strapped States Delay Tax Refund Checks, Face Interest Payments

By ALICE GOMSTYN
ABC NEWS Business Unit

June 3, 2010 —

Christopher Gallagher used his federal tax refund to pay off his credit cards bills. He’ll use his North Carolina state tax refund to get his car repaired — that is, if the check ever arrives.

“I just went to go and get the mail earlier and there was nothing in there from the state,” Gallagher, of Greensboro, N.C., said Wednesday. “I’m just wondering where it’s at.”

North Carolina is one of a handful of cash-strapped states that have taken longer than usual to send tax refund checks this year.

Earlier this year, New York pushed back its refund payments by a couple of weeks while Iowa and Rhode Island both admitted to longer refund delays for some taxpayers.

Hawaii officials announced in February that they would hold back refunds until July 1, but last month provided some good news to the state’s early bird tax filers: Those who sent in their returns in January and February, at least, would begin getting their refunds immediately.

“I would like to thank the public for its patience as we continue to address our budget shortfall while at the same time positioning Hawaii for a brighter economic future,” Hawaii Gov. Linda Lingle said in a statement last month.

Veranda Smith of the Federation of Tax Administrators said it’s actually been a relatively quiet year with respect to tax refund delays.

“This could be a normal year, aside from the economy,” she said.

States that are holding back refunds this year are doing so because either they’re short-handed — it takes manpower to process returns, especially those that are mailed in instead of filed online — or because of cash flow problems.

Rhode Island’s tax refund challenges, she said, were exacerbated by the fact that a flood forced the state to delay its filing deadlines. With money coming in later from those who owed taxes, she said, the state had less cash on hand to immediately to pay those who were due refunds.

There’s a major incentive for states to provide tax refunds sooner rather than later — state laws require that states pay interest on tax refunds that are sent after specific deadlines. Deadlines vary by state but tend to be between 30 and 90 days after the state’s tax filing deadline, Smith said.

States Owe Interest to Taxpayers on Late Refunds

Last year, Georgia had to pay $2 million in tax refund interest payments after the elimination of some state tax jobs caused refund delays.

This year, it’s North Carolina that may face significant interest payments. The state was supposed to send all its refunds by the end of last month but has failed to do so for some 312,000 taxpayers, who are owed a collective $222 million.

“We are monitoring and managing the distribution of refunds each week as the state’s cash flow allows. We are working diligently to issue refunds to the citizens of North Carolina as quickly as we possibly can,” said North Carolina Department of Revenue spokeswoman Beth Stevens.

State law requires North Carolina to pay a five percent annual interest rate on late refunds.

Greensboro taxpayer Gallagher, 43, said he’s pleased that he’s eligible for extra cash, but he still would have rather just gotten his refund earlier. He said he filed his return in early April and is owed more than $1,400 from the state.

“It’s been two months,” he said. “We give them money. They use our money. They should have that money in a pot to give back to us.”