Protecting Americans From Tax Hikes (PATH) Act: Definition

What Is the Protecting Americans From Tax Hikes (PATH) Act?

The Protecting Americans from Tax Hikes (PATH) Act of 2015 was an Obama-era law that expanded or renewed several 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 If an ITIN has not been used in a tax filing during the previous three years, it is no longer valid, and a new number must be obtained.
• 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.
  

The PATH Act also renewed about 50 temporary tax breaks for individuals and businesses that had passed their original expiration dates.

Understanding the PATH Act

The PATH Act focused on several 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.

Special Considerations

Tax credits are particularly vulnerable to fraud by taxpayers seeking to score credits they aren't eligible for and by con artists preying upon eligible taxpayers. This was notably through the Child Tax Credit and the Earned Income Credit.

Child Tax Credit

The Child Tax Credit (CTC) program, which was substantially expanded to relieve American families of some of the financial burden caused by the COVID-19 pandemic, delivered payments of up to $300 per month per child to taxpayers below certain income levels through 2021.

Eligible taxpayers 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 were required 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, posing as government representatives 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 to qualify for the credit.

Earned Income Credit

A second opportunity for attempting to defraud the IRS occurred through the Earned Income Tax Credit (EITC). This credit, worth $560 to $6,935 a year, is available to low and moderate-income individuals, with larger amounts credited to families with children.

An attempted fraud can occur when someone files a tax return that falsifies the person's earned income, the number of children in the family, or both.

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 EITC or 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 full ACTC amount applies to all families that make less than $200,000 ($400,000 filing jointly) and decreases as income increases over that level.

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.

New and Extended Tax Provisions in the PATH Act

The PATH Act renewed many expired tax laws and introduced a few new laws affecting individuals and businesses. Many tax deductions set to expire, such as tuition deductions, certain charitable contributions, and residential energy credits, were extended with retroactive credit.

Below are a few 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.

The PATH Act retroactively extended 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.

Wrongful-Incarceration Exclusion

The PATH Act allows exonerated people to omit any monetary awards related to wrongful incarceration from their reported earned income. It also provides wrongfully-incarcerated individuals with a window to file refund claims related to restitution or monetary awards (including civil damages) received and reported in a prior tax year. The term "PATH Act Refund" is sometimes applied to this provision.

Renewal of Individual Taxpayer Identification Number (ITIN)

The ITIN is used primarily by taxpayers who cannot obtain a Social Security number (SSN). 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 deal 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.

The expanded Child Tax Credit was set to be expanded by the Build Back Better bill, which was proposed by President Joe Biden. The House of Representatives passed the measure, but it stalled in the Senate. The expanded credit, however, didn't appear in the Inflation Reduction Act of 2022 at the federal level, which replaced the BBB bill and was signed into law on Aug. 16, 2022.

The Bottom Line

The PATH Act of 2015 was an Obama-era law that expanded and renewed several tax credits for individuals, families, and businesses. At the same time, it implemented safeguards to prevent fraudulent claims for those credits. This was a vulnerability that emerged as scammers targeted families to obtain their potential credits, and individuals ineligible for them attempted to attain them. The act remains in place today.