What Is the Protecting Americans From Tax Hikes (PATH) Act?
The Protecting Americans from Tax Hikes (PATH) Act of 2015 is an Obama-era law that expanded or renewed a number of tax credits for individuals, families, and businesses while implementing measures to prevent fraudulent claims for those credits. The act remains in force.
The act primarily affects people who are eligible to receive certain tax credits:
- People filing for the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) must have a Social Security number or a valid Individual Taxpayer Identification Number (ITIN). If an ITIN has not been used in a tax filing during the previous three years, it is no longer valid and a new number must be obtained.
- In any case, refunds that include these credits are not issued before Feb. 15 of each year. That gives the Internal Revenue Service (IRS) time to check for fraudulent claims.
In all, the PATH Act renewed about 50 temporary tax breaks for individuals and businesses that had passed their original expiration dates.
- The Protecting Americans from Tax Hikes (PATH) Act of 2015 renewed some 50 tax breaks for individuals and businesses.
- It also put into place procedures to forestall attempts to defraud the government by falsely claiming tax credits.
- The Child Tax Credit and the Earned Income Tax Credit, both created as temporary tax breaks for families, were made permanent under the Path act.
- The act also retroactively extended the Work Opportunity Tax Credit (WOTC), a credit for employers who hire individuals from groups that have consistently faced employment barriers.
Understanding the PATH Act
The PATH Act focused on a number of tax credits for individuals, families, and businesses. It extended some credits permanently and expanded eligibility for others.
A tax credit, in general, is more valuable to the taxpayer than a tax deduction. A tax deduction merely reduces the person's taxable income. A tax credit reduces the amount of taxes owed, dollar for dollar.
A tax credit may also be refundable or partially refundable. In that case, a low-income taxpayer might owe little or no taxes and receive a check from the IRS for some or all of the credit.
Opportunities for Fraud
Tax credits are particularly vulnerable to fraud by taxpayers seeking to score credits they aren't eligible for and by con artists preying upon taxpayers who are eligible.
The Child Tax Credit is a case in point. The program, which was substantially expanded to relieve American families of some of the financial burden of the COVID-19 pandemic, delivered payments of up to $300 per month per child to taxpayers below certain income levels through 2021. (The status of the child tax credit in 2022 is unclear as of January 2022.)
Taxpayers who were eligible automatically received those payments, because the IRS had the information it needed to identify them. But those whose incomes were so low that they didn't have to file needed to sign up for the credit online.
And that fact opened up an opportunity for con artists masquerading as IRS agents. They approached people by text, email, phone, and social media post posing as government representatives in order to trick personal information out of the unwitting.
The other target for fraud, of course, was the IRS itself. Tax filers could commit fraud by underreporting their income or inventing dependents in order to qualify for the credit.
The Earned Income Credit Fraud
A second opportunity for attempting to defraud the IRS occurred through the Earned Income Tax Credit (EICF). This credit, worth $538 to $6,660 a year, is available to low and moderate-income individuals, with larger amounts for families with children.
An attempted fraud can occur when someone files a tax return that falsifies the person's earned income or the number of children in the family, or both.
The IRS warns that people eligible for the Child Tax Credit are being bombarded with calls, texts, email messages, and social media posts from scam artists seeking to steal their money. The agency warns taxpayers not to give out personal or financial information to anyone purporting to be from the IRS.
Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC)
There was no change in the tax filing process due to the PATH Act. In most cases, the IRS expects to send refund checks within 21 days.
However, if you file an Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) return early in the year, the IRS will hold your refund check until Feb. 15. The reason for the delay is to provide the IRS with additional time to identify fraudulent claims and to prevent refunds from being paid to identity thieves.
The EITC applies to low-income and medium-income individuals and families, with or without children. Tax credits depend on the number of children. The earned income threshold for claiming the ACTC is $2,500.
If the EITC or ACTC doesn't apply to you, or if you file taxes after Feb. 15, the PATH Act does not affect the timing of your refund.
As a result of the American Rescue Plan of 2021, the EITC's original cap at $543 for childless households increased to $1,502 for 2021.
New and Extended Tax Provisions in the PATH Act
The PATH Act renewed many expired tax laws and introduced a few new laws which affect both individuals and businesses. Many tax deductions that were set to expire, such as tuition deductions, certain charitable contributions, and residential energy credits, were extended with retroactive credit for 2015.
Below are a few of the many PATH Act changes and extensions for individuals and businesses.
Extension of the Work Opportunity Tax Credit (WOTC)
Employers may be eligible for a Work Opportunity Tax Credit (WOTC) if they hire individuals from specified target groups that have historically faced barriers to employment.
PATH Act retroactively extends WOTC eligibility to workers hired on or after Jan. 1, 2015. The WOTC includes nine categories of workers and an additional category for long-term unemployment recipients hired on or after Jan. 1, 2016.
The PATH Act includes an exclusion that allows a wrongfully-incarcerated individual a one-year window to file refund claims related to restitution or monetary awards (including civil damages) received and reported in a prior tax year.
According to the Wrongful Incarceration FAQs published by the IRS, the PATH Act allows exonerated people to omit from their reported earned income any monetary awards they received that relate to the wrongful incarceration.
Renewal of Individual Taxpayer Identification Number (ITIN)
The ITIN is used primarily by taxpayers who cannot obtain a Social Security number. Most are foreign citizens who earn income in the U.S. or from U.S. sources.
The PATH act required these taxpayers to get a new ITIN number if they have one but have not used it in a tax return in the previous three years.
An ITIN number can be obtained by mailing Form W-7 to the IRS or visiting an IRS office or IRS-authorized agent.
Using an expired ITIN could result in a refund delay or ineligibility for tax credits.
Tax Policy Today
As a topic of debate and discussion, the PATH Act has long been supplanted by newer legislation, some of which deals with the tax credits renewed back in 2015. The fate of the Child Tax Credit is particularly at issue.
The American Rescue Plan, passed in 2020 to relieve taxpayers harmed economically by the COVID-19 pandemic, extended the Child Tax Credit to many more American Families and increased the size of the payments. That provision expired at the end of 2021.
At the start of 2022, the Build Back Better Act, which would renew the expanded Child Tax Credit, has been proposed by President Joe Biden. The House of Representatives passed the measure but it was stalled in the Senate as of Jan. 22, 2022.
What Is a PATH Act Refund?
The term "PATH Act Refund" is sometimes applied to a single provision of the act that allows wrongfully-incarcerated individuals one year to file refund claims related to restitution or monetary awards received and reported in a prior tax year.
That is one of the few truly original provisions in the act. The law's primary focus was to renew existing tax breaks for individuals and businesses and to put in place safeguards against fraud and abuse of tax credits.
The PATH Act passed in 2015, renewed about 50 tax credits that would have expired if no action had been taken. Tax breaks that are now familiar to millions, such as the Earned Income Tax Credit and the Additional Child Tax Credit, would not exist if the act had not become law.
This is not to say that these provisions are permanent in any sense. Subsequent Congressional action could eliminate them, expand them, or reduce their value to taxpayers.
What Tax Provisions Were Extended in the 2015 PATH Act?
The most wide-reaching provisions of the 2015 PATH Act have tax breaks for lower-income families:
- The Additional Child Tax Credit (ACTC) allows eligible families a credit of up to 15% of the income they earn above a threshold of $3,000. This is a refundable credit, meaning that eligible families receive a check from the IRS if the amount of the refund exceeds their taxes due.
- The income threshold for eligibility for the Earned Income Tax Credit (EITC) was raised by $5,000 for those who are married or filing jointly. That extends the credit to many more lower-income working families.
Why Is the PATH Act Important?
The most significant aspect of the PATH Act is perhaps its focus on reining in fraud committed against individual taxpayers, the IRS, or both.
The act may have had some impact on direct theft of money from the IRS or from individuals. However, it may have had little impact on identity theft. The IRS has warned that scam artists posing as IRS agents have been attempting to persuade taxpayers to turn over their personal or banking information in order to receive the Child Tax Credit.