How will a government shutdown affect tax returns and refunds? In this article, we talk about what causes a government shutdown and how it can affect tax returns and refunds.
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In this article:
- What Is a Government Shutdown?
- What Happens During a Government Shutdown?
- How Many Government Shutdowns Have There Been in the U.S.?
- How Will the Government Shutdown Affect Tax Returns?
- Will the Government Shutdown Affect Tax Refunds?
Government Shutdown Tax Returns and Refunds | What You Need to Know
What Is a Government Shutdown?
A government shutdown happens when the normal budget process doesn’t push through successfully. Ideally, by September 30, Congress should appropriate the national budget for the following fiscal year.
The US Congress enacts the federal budget process, based on the Congressional Budget and Impoundment Control Act of 1974. This act allows the Senate and the House of Representatives to do the following:
- Establish their own budget committees, for the purpose of negotiating budget appropriation.
- Create the Congressional Budget Office, whose purpose is a non-partisan Congressional review of recommended budget plans.
- Reschedule the fiscal year, which now starts on October 1 as opposed to July 1.
The budget process begins around a year and a half ahead of the fiscal year. It’s a multi-step process that starts with government agencies creating their budget proposals, which will assist the President’s budget request.
Once the President has created a budget request, it goes through Congress. Once both chambers agree on a bill, it’s presented to the president who will sign it into law.
By September 30, the federal budget should already be passed into law. Unfortunately, there are instances when this doesn’t happen.
What Happens During a Government Shutdown?
In cases when no federal budget is approved within the timeline, Congress has the option to either pass a continuing resolution or declare a government shutdown.
The former ensures that federal agencies continue to carry out their regular functions while Congress attempts to resolve the budget deadlock. In contrast, a government shutdown closes non-essential discretionary programs and offices.
Those deemed essential include offices that provide services related to national safety, security, and defense, such as:
- Federal Bureau of Investigation (FBI)
- Transportation Security Administration (TSA)
- Drug Enforcement Agency (DEA)
- Customs and Border Protection (CBP)
How Many Government Shutdowns Have There Been in the U.S.?
Here’s a list of previous US government shutdowns.
- 1976 (President Gerald Ford/lasted 10 days, September 30 to October 11)
- 1977 (President Jimmy Carter/lasted 12 days, September 30 to October 13/lasted 8 days, October 31 to November 9/lasted 8 days, November 30 to December 9)
- 1978 (President Jimmy Carter/lasted 18 days, September 30 to October 18)
- 1979 (President Jimmy Carter/lasted 11 days, September 30 to October 12)
- 1981 (President Ronald Reagan/lasted 2 days, November 20 to 23)
- 1982 (President Ronald Reagan/lasted 1 day, September 30 to October 2/lasted 3 days, December 17 to 21)
- 1983 (President Ronald Reagan/lasted 3 days, November 10 to 14)
- 1984 (President Ronald Reagan/lasted 2 days, September 30 to October 3/lasted 1 day, October 3 to 5)
- 1986 (President Ronald Reagan/lasted 1 day, October 16 to 18)
- 1987 (President Ronald Reagan/lasted 1 day, December 18 to 20)
- 1990 (President George H.W. Bush/lasted 3 days, October 5 to 9)
- 1995 (President Bill Clinton/lasted 5 days, November 14 to 19)
- 1995-1996 (President Bill Clinton/lasted 21 days, December 16 to January 6)
- 2013 (President Barack Obama/lasted 16 days, October 1 to 17)
- 2018 (President Donald Trump/lasted 1 day, February 9/lasted 3 days, January 20 to 23)
The most recent government shutdown under the Trump administration, which transpired between December 2018 and January 2019, is the longest in US history. The shutdown lasted for 35 days.
The shutdown was a result of President Trump’s and the Congress’ disagreement on the $5.7 billion budget allocation to fund the construction of a steel barrier wall at the US and Mexico border.
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How Will the Government Shutdown Affect Tax Returns?
The longest-running government shutdown under the Trump administration compromised at least 800,000 federal employees. They were either furloughed indefinitely or, in cases of TSA agents and Border Patrol officers, were made to work without pay.
Since no budget is available for disbursement to federal government offices, the budget that would supposedly cover salaries and wages, federal employees bear the brunt of a government shutdown. However, the effects of this crisis aren’t just limited to those directly linked to offices and programs under the federal government.
Government shutdowns also affect those who need to work with a specific government agency. Take for instance taxpayers who are in the process of filing their tax returns.
Since the Internal Revenue Service isn’t classified as an essential agency, it encounters problems during a shutdown since it loses funding to compensate its workers.
During the last shutdown, the IRS put two contingency plans in place. In the second version of the plan, the IRS increased the percentage of staff it will retain from 12.5% to 57.4% of their workforce.
This initiative was done in an effort to avoid a noticeable impact on tax returns and refunds since among the functions that were deemed necessary to continue include processing of electronic returns and returns with payments. This means taxpayers can continue to file taxes and get refunds.
Will the Government Shutdown Affect Tax Refunds?
A government shutdown’s effects on tax refunds would depend on how long the shutdown lasted. For instance, if another government shutdown happens and extends to 2020, but is settled in the early weeks of January, chances are 2019 refunds won’t be severely affected.
However, if the shutdown extends to February or beyond, expect delayed processing and release of tax refunds. This is in line with the assumption that federal budget ready for disbursement is near-depletion.
Refunds that date back earlier than 2019 would have a harder time getting released.
During a shutdown, there’s a risk of delays in tax refunds, which could be caused by two reasons:
- If the IRS didn’t retain enough employees to process refunds.
- It’s also possible that workers will stop going to work because they won’t get paid.
Other functions that had to cease operations because of the shutdown include:
- Audits
- Non-automated collections
- Examination of returns
A government shutdown has far-reaching effects, and that includes tax schedules. Should another government shutdown happen, it’s important for taxpayers to know how this crisis affects their taxes so they can prepare how to deal with their tax responsibilities accordingly.
Any thoughts on how a government shutdown affects taxes? Please share them in the comments section below.
If you owe back taxes, visit taxreliefcenter.org for more information on tax relief options.
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