IRS Staffing Cuts May Delay Tax Refund Advances

A financial lifeline for many consumers — particularly lower-income consumers — in the form of tax refunds may be fraying a bit at a time when those refunds may be needed to bolster households against economic headwinds.

The impact of the IRS staffing cuts is still unknown, but a dip in year-over-year tax filing activity, per the department, indicates a glut of returns and an uncertain timeline for refunds, which in turn may impact some of the firms that offer tax filing services, and rely on a percentage of those refunds for their own revenues.

The Financial Lifeline

PYMNTS Intelligence at the end of last year documented the ways in which savings and savings rates (as a percentage of disposable income) have been pressured by inflation.

The roughly $2,400 in savings and the $7,700 held by paycheck-to-paycheck consumers with and without issues paying bills, respectively, have been far outpaced by the $20,000 held by consumers without those issues. At the end of the year, saving as a precent of disposable income dipped to 4.1%, where past peak levels had been above 5%.

It’s well known that tax refunds can help improve retailers’ fortunes with a bump in sales. But data from Credit Karma released earlier this year showed that 37% of taxpayers depend on their refund to make ends meet, including 50% of millennials. Within that population, 45% say they rely on those refunds due to the higher cost of living and 22% say they need the money to pay down debt, including credit card debt. Elsewhere, LendingTree estimated that 34% planned to pay down debt, while 32% planned to deposit their refunds into their savings accounts.

PYMNTS Intelligence has reported that credit card debt, averaging more than $5,000, but topping $7,000 for struggling consumers, has been a concern as two-fifths of those constrained borrowers hit their card limits with some regularity.

The Shakeup at the IRS

The IRS itself is in the midst of a shakeup, as reports indicate the agency may cut as much as half of the 90,000-roster staff. The fate of probationary employees who were fired and then put on paid leave still remains undetermined. At the same time, early retirements leave vacancies at the agency, which then go unfilled and may impact the timeliness of tax refunds.

Most tax prep companies, including TurboTax and H&R Block, offer tax refund advance loans, where filers can access their funds early, and the loans are paid back automatically when the IRS issues the refund (and any leftover amounts remain with the taxpayer). The closing period for most of those offers was by the end of last month, so the average 21-day period for the refund process (that’s the IRS estimate) is still in effect.

There’s a dual impact in the event that those refunds are delayed: Consumers still have a loan outstanding (though they tend not to carry interest rates) and the provider must wait to be paid back. PYMNTS reached out for comments from H&R Block and Intuit (which owns TurboTax) but had not heard back as of this writing. The Treasury Inspector General for Tax Administration reported that 21.9 million out of 138 million (15.9%) filers for the tax year 2023 returns used refund advance offerings.

Thus far, as the IRS noted, the total returns received through the third week of February were actually down by 4.2% year on year; the total number of returns processed slipped 3.8% year over year. The filings e-filed by tax professionals slid by 5% to 18.3 million. The average refund amount was up 7.5% to $3,453, which indicates that the financial lifeline consumers are banking on will be a bit more substantial … but the wait may be long.