File 2010 Tax Returns Early: State Issue IOU Refunds on the Rise

California made headlines last tax season when tax payers were informed they may not get to take advantage of the April tax-rebate sales: instead of receiving their timely refund, Californians received state-issued "warrants" or glorified IOUs from their state government. It seems the 2010 tax season may have more states using the IOU tactic to stay in the green on state budgets.

California's money woes are no secret and have been fodder for a multitude of political lampooning as well as rumors that state employees, like teachers and government workers, would have to take IOUs as paychecks during tight times in 2009. The tax-rebate IOUs weren't popular - a media storm parading hundreds of Californians who said they had budgeted their tax rebates for necessities, not luxury items like tax rebates are traditionally spend on in our country.

Before the IOUs had been issued, many banks stopped accepting them. Some citizens reported credit unions that were still accepting, but charging up to 3 percent. Tax payers complained that they couldn't use the IOU to pay their landlords, utilities companies, or credit cards.

Still, most Americans shrugged at the news coverage. That's California, right? If you believe Sex in the City, those people all get Brazilians, host porn parties and go to fine restaurants only to chew food (but never swallow it) to save calories. My state is in much better fiscal shape.

But as the 2010 tax season gets underway, not only has California released plans to try the IOU fiasco again, but Arizona, Hawaii and North Carolina have jumped on board, with New York not far behind.

Although some early filers in each of these states have reported in forums that they have received their refunds already, the state governments have begun issuing tax refund IOUs to current filers. New York has already issued $293 million to early tax filers and North Carolina has mailed out $400 in checks to tax refunds. But as the states run out of money, they are holding onto their checkbooks until the coffers fill back up.

In December 2009, Arizona State Treasurer Dean Martin told media that state issued IOUs was a given and the budget may even require state workers to take IOUs. Arizona is facing a $1.6 billion shortfall in their budget. Martin said the state's deficit represented 42 percent of authorized spending, the highest deficit in the nation per capita compared to an average of 17 percent.

Martin predicted Arizona's budget issues would get worse until halfway through 2010 before finally plateauing and beginning a sloth-like climb toward the end of the year.

The idea behind the tax refund IOUs, for each of the concerned states, is to keep from hitting red in their budgets before the end of the fiscal year, April 1, 2010.

The North Carolina Revenue Secretary Ken Lay compared the tactic to the same one budget-conscious families use when balancing their own checkbooks and paying bills. You only send out checks when you have the money to pay them. "When you are writing those checks to pay your bills, you want to make sure that you have enough in the account to pay each one of them."

According to state laws, North Carolina and California have until June to issue real tax refunds before owing the taxpayers interest on the amounts in question. Still, many citizens are questioning the double-standard of this approach by the government. One person posted a comment on North Carolina News Observer's web-based article, "Would the state be cool with it if I held on to my funds a little later than, say, April 15 so I can be sure to have sufficient funds in my accounts?"