The PATH Act: What It Is and How It Affects Your Taxes

Nearly every taxpayer with dependent children could be impacted by the PATH Act at some point. In addition to other tax-related provisions, the PATH act affects two extremely common tax credits: the Earned Income Tax Credit and the Additional Child Tax Credit. Here’s what every taxpayer should know about the PATH Act:

What is the PATH Act?

The Protecting American from Tax Hikes (PATH) Act was passed in 2015 to help protect taxpayers and prevent fraudulent returns. By giving the IRS more time to process certain returns and refunds, the PATH act aims to reduce identity theft and individual tax return fraud. Other lesser-known provisions of the PATH act affect taxpayers who use ITINs, taxpayers who have been wrongfully incarcerated, and businesses who hire employees from certain target groups.

How does the PATH Act affect your taxes?

The Earned Income Tax Credit and Additional Child Tax Credit

The PATH Act contains several provisions, but the most well-known are the mandates concerning the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). Any taxpayers who qualify for the EITC or ACTC will not receive their refunds before February 15, even if they filed weeks earlier. The extra time allows the IRS to prevent more cases of identity theft and fraud.

Work Opportunity Tax Credit

The PATH ACT also extended the Work Opportunity Tax Credit, a tax credit available to businesses who hire from several targeted groups who have “consistently faced barriers to employment” such as veterans and ex-felons. The tax credit is applied against a business’s share of Social Security tax.

Individual Tax Identification Numbers

Under the PATH Act, some taxpayers must renew their ITINs in order to file and avoid delays in receiving their refunds. Taxpayers must request a new ITIN if it has expired and must renew their ITIN if it has not been used in three years. 

Wrongful-incarceration Exclusion

These provisions allow a person who was once wrongfully incarcerated to exclude civil damages and restitution payment from their income and claim tax refunds on taxes that were collected from these payments in prior years. 

What do taxpayers need to know about the PATH Act?

• The EITC and ACTC provisions will be relevant for most tax preparers as these tax credits are extremely common. If you have early-filing clients who qualify for the EITC or ACTC, be sure to let them know they will not receive their refund until after February 15, no matter how early they file. You can also direct them to the IRS’s Where’s My Refund? page for updates on the status of their refund.
• If you have business clients, ask if they hire from any of the target groups specified in the Work Opportunity Tax Credit.
• Most tax preparers won’t need to know the details of the wrongful incarceration exclusions. If, however, you do have a client who was once wrongfully incarcerated, you will want to review the tax exclusions stipulated in the PATH Act.
• ITINs are only for resident and nonresident aliens and their families who do not qualify to get a Social Security number. If you serve any clients who use ITINs, make sure they are aware of the renewal requirements.
• The PATH Act made changes to the way Partnerships and Partners are treated when the entity is audited. It repealed the audit regime for partnerships. This change allows a partnership to make an election to have the partnership treated a certain way in the event the entity is audited. The PATH Act changed the burden of any tax deficiencies to the partnership and away from the partners. This is the opposite of how it was before this PATH Act provision went into effect.

PATH Act Tax Refunds

According to the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) Section 201(b) which is codified at IRC 6402 (m), the IRS cannot issue refunds, including applying credit elects, before the 15th day of the second month following the close of the taxable year (February 15 for fiscal year filers) for tax returns that claim the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC). This applies to the entire refund, even the portion not associated with these credits. Taxpayers should not expect their refund to arrive in their bank accounts or debit cards until the week of February 27 or later, if there are no other processing issues.

For taxpayers who meet PATH Act criteria, the following message is provided on the automated systems through February 15th. “According to the Protecting Americans from Tax Hikes (PATH) Act, the IRS cannot issue these refunds before mid-February for tax returns that claim the Earned Income Tax Credit or the Additional Child Tax Credit. This applies to the entire refund, even the portion not associated with these credits. Check Where’s My Refund in mid-to-late February for your personalized refund status. It’s updated once a day and remains the best way to check the status of your refund.”

Accounts meeting the PATH Act Section 201 criteria will have a C- freeze generated on the account and will carry an Indicator of 1, 2, or 8. See IRM 21.5.6.4.5, C- Freeze, for additional information on PATH Act freeze. To identify PATH Act Section 201 returns, the following indicators will appear on IMFOLT under the new “FEB15 RFND FRZ” field:

Indicator 0: No Freeze (Return did not claim EITC or ACTC)

Indicator 1: Refund Frozen (Return filed before February 15th, claiming EITC and/or ACTC. Prevents offsets)

Indicator 2: Historical setting (Set after February 15th to signify a return that had the indicator 1 set previously and is now after February 15th and Freeze was released)

Indicator 8: IMF internal setting to indicate freeze occurred in the current cycle

Exception:

The C- freeze code (shows Path Indicator of “1”) is set to be released on February 15th, however, this is contingent on Daily or Weekly processing of the account, therefore, the release may occur after February 15th. Once the freeze is released, the account will reflect a Path Indicator of “2”. See IRM 3.11.10.3.1, CADE 2/ IMF Daily Processing, for information on daily and weekly processing.

Caution:

Fiscal year accounts meeting the PATH Act Section 201 criteria can be identified with a TC 971 AC 134 with the MISC field “IVO REVIEW”. These accounts will not show a C-freeze. DO NOT release the refund if the indicator is present. Conduct thorough research prior to taking any action on the account.

Beginning January 1, 2017, accounts with a C- freeze in which the original or amended tax return includes EITC and/or ACTC, will not be considered for TAS referral when the request is for the refund to be released prior to February 15th (15th day of the second month for fiscal year filers). These returns will only qualify for the TAS criteria listed in IRM 13.1.7.2, TAS Case Criteria, when the qualifying criteria is unrelated to releasing the refund prior to February 15th. As a result, accounts with refunds that include EITC and/or ACTC referred and resolved by TAS will not be released until February 15th or later if there are processing issues. As of January 1, 2017, the IRS is restricted from releasing refunds that include EITC and/or ACTC until February 15, for current year tax returns that include EITC and/or ACTC, and

• Cannot perform a partial refund release such as the non-EITC or non-ACTC portions or withholding
• Cannot initiate an early refund release because filtering and income match is not completed prior to February 15
• Cannot prepare a manual or expedited refund for an exception process such as economic hardship
• Cannot perform a refund offset to pay for other IRS tax debt on another module or account