Americans can expect lower tax returns this year, a phenomenon which comes as inflation and broader economic volatility continue to rattle household finances.
The average tax refund amount issued by the IRS is $2,878 this year, according to data from the tax enforcement agency posted earlier this month, which marks a 9.3% decrease from the $3,175 average tax refund seen last year. The total amount of refunds provided to taxpayers likewise fell from $222 billion last year to $199 billion this year.
The IRS indeed announced earlier this year that “many taxpayers may find their refunds somewhat lower” as various tax law changes enter into effect. Parents are no longer able to receive the advance child tax credit, an advance on the child tax credits formerly enacted by the American Rescue Plan, while taxpayers who did not receive stimulus checks will no longer be able to claim a recovery rebate credit.
“It’s reasonable to expect that many people will receive smaller tax refunds this year,” Bankrate Senior Industry Analyst Ted Rossman said in a statement last month. “That’s mostly because many pandemic-related tax breaks have expired: stimulus payments, the expanded child tax credit and the expanded child and dependent care credit, to name a few.”
Bankrate found in a recent survey that 45% of tax filers expected a refund this year, while 19% expected to owe the government and 16% expected to break even. Some 43% of respondents consider the refunds “very important” to their financial situations, while 32% consider them “somewhat important.”
Several additional polls over the past several months have shown that rising costs of living, which come as a result of record inflation, are producing a sense of economic pessimism. Headline inflation was charted at 5.0% in March 2023, according to data from the Bureau of Labor Statistics, a decline from the 9.1% rate charted in June 2022. Real wages, which consider the effect of inflation on nominal pay increases, fell 1.3% year-over-year as of March 2023, according to more data from the Bureau of Labor Statistics.
The present tax season, which requires most filers to submit their returns on April 18, is the first since the Inflation Reduction Act provided the IRS with an $80 billion windfall to double the size of its workforce. Treasury Secretary Janet Yellen testified before the House Ways and Means Committee last month that the funds resulted in taxpayers receiving “drastically improved customer service” because staffers were equipped to answer “hundreds of thousands more phone calls during this filing season than at this time last year.”
Yellen likewise vowed that the funds would not be used to increase audit rates for American households earning less than $400,000 per year “relative to historical levels.” She failed to clarify that “historical levels” of enforcement were far higher as recently as one decade ago: audit rates for Americans earning between $25,000 and $200,000 declined 76% between 2010 and 2019, according to data from the Government Accountability Office.
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Various proposals from the IRS which appear to be targeted toward average households rather than high earners have raised concerns that the newly enlarged agency will implement more intense scrutiny for all taxpayers. One proposed rule would increase reporting compliance for individuals who earn tips, while another would require Americans to report transactions above $600 made with payment settlement organizations such as PayPal and Venmo.