Hawaii residents who expect state income tax refunds in 2016 may have to wait.
State Tax Director Maria Zielinski says it will again take up to 16 weeks to process refund payments this year because the state is continuing to aggressively scrutinize tax returns in its ongoing crackdown on fraudulent filings.
A similar slowdown in refunds last year triggered an angry outcry from Hawaii taxpayers who were forced to wait weeks or months for their state refund checks.
The Department of Taxation last year deployed new “filters” to screen tax filings to ferret out fraudulent returns, and that effort exposed more than $32 million in fraudulent filings for refunds, Zielinski said. However, the extra screening also slowed payment of legitimate refunds.
Tax officials said they are doing their best to prepare for speedier processing of legitimate refunds this year.
“We realize that a lot of people plan that money for things in the house or a vacation or whatever it might be, or just in general paying bills, so we want to be mindful of that, but we also want to be mindful that we don’t want to throw out state taxpayer money to crooks,” Zielinski said.
A new message posted on the tax department’s website Friday said the department “has adopted additional safeguards that may delay tax refunds for some taxpayers, but not all, up to 16 weeks. We encourage taxpayers who are expecting refunds to file early. By filing early, taxpayers are more likely to receive their refund quicker.”
The state processed about 715,000 income tax returns from the start of last year to July 1, including about 542,000 that were seeking refunds. The state issued about $443 million in refunds last year.
Traditionally it has taken the state six to eight weeks to process income tax refunds at the height of the tax season, but that changed dramatically last year to about 16 weeks after the state assembled an ad hoc anti-fraud crew with staff drawn from various divisions of the tax department.
That team began using 19 filters to aggressively screen for fake or fraudulent returns, a process that slowed refunds and prompted the complaints from the public.
Last year Zielinski said the delays in processing returns were “unacceptable,” and would be fixed by this year. She acknowledged tax officials initially were too aggressive in the use of the filters to identify fraudulent returns, and said they had to adjust the system after the start of last year’s tax filing season to to keep valid returns flowing through the system properly.
Since last year, Zielinski said the department has made modifications to those systems. “I really truly believe we’re going to have a much smoother refund processing than we did last year. We’re just being conservative” with the 16-week warning, she said.
“We know we can’t have what we had last year, but we didn’t expect to be hit with that kind of fraud, either,” she said. “We really were hit with some very, very sophisticated fraudulent refund returns.”
House Finance Chairwoman Sylvia Luke said that sounds similar to last year’s problems, “and we would have expected that between last year and this year the Department of Taxation would have done a better job to see if they can get the refunds out quickly and then also deal with some of the fraud issues.”
Luke said many working-class and middle-income families who are waiting for their refunds will immediately spend the money once they get it, and that money goes right into the state’s economy.
“The longer the state holds onto it, it doesn’t really help us, because it’s money that’s supposed to go to the taxpayers,” said Luke (D, Punchbowl-Pauoa-Nuuanu). Luke said she plans to question the tax department about the issue when the department appears before her committee Monday.
State Rep. Isaac Choy, who is a certified public accountant, said that if the state is going to take that long to process refunds, it should offer a break to Hawaii taxpayers who under-withhold or underestimate on their quarterly tax payments to the state.
Savvy taxpayers who don’t want to wait 16 weeks for their refunds may under-withhold, said Choy, who is a former chairman of the state Tax Review Commission. The state ought to allow that by waiving penalties for people who under-withhold or underestimate their estimated quarterly tax payments, he said.
“If they can’t process refunds expediently, then they should look for other avenues to be fair to the taxpayers,” said Choy (D, Manoa-Punahou-Moiliili). “I applaud them for their effort to detect fraudulent refunds, but they have to keep the consumer, which is the taxpayer, in mind too as they put these procedures together.”
Zielinski said the long-term solution to the delays is the ongoing modernization of the department’s computer systems, which should automate much of the screening for fraud, and make processing faster.
“We believe it will because right now we’re working with a legacy system that does not have a lot of the analytics that we will have in our new system,” she said. “Our new system will have a lot of the fraud detection and fraud prevention that we don’t have. Right now, the only way we can prevent fraud, more or less, is by manually having people looking at the paper.”
The department has struggled with information technology problems for years. The state first signed an agreement with CGI Group Inc., which was paid $87.5 million to install what state officials now describe as an outdated computerized tax collection system.
Now a new effort is underway to modernize and improve tax collections, and the state last year signed a second, entirely new $59 million contact with another company to modernize the tax system.
However, the department’s computer modernization effort is being done in phases, and the phase that includes income tax returns is not scheduled to come online until 2018, Zielinski said.
“We do believe there’s a light at the end of the tunnel,” she said.
The message on the tax department website explained the state may pay interest on a refund if it is not issued by July 20, 2016.
“Please be assured that we are doing everything we can to expedite the processing of all tax returns and ask for the public’s continued patience,” the message said.
