The PATH Act: What It Is And How It Affects Your Tax Clients

The Protecting American from Tax Hikes (PATH) Act was enacted in 2015 to help strengthen fraud prevention and protect federal tax returns from identity theft. While many other tax laws have evolved over the years, the PATH Act’s key anti-fraud provisions remain unchanged, continuing to affect millions of taxpayers each filing season.

Most tax professionals regularly work with clients who feel the impact of the PATH Act, especially those claiming the Earned Income Tax Credit (EITC) orthe Additional Child Tax Credit (ACTC). Taxpayers claiming these refundable credits can expect their refund to be delayed until at least February 15th. Understanding what the PATH Act is and how it affects refund timing is essential for guiding clients through early-season expectations.

How does the PATH Act affect your tax clients’ taxes and credits?

The PATH Act affects early-season tax refunds, refundable tax credits like the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC), and identification rules for taxpayers who use ITINs. These provisions include verification requirements to reduce identity theft and fraudulent returns. These changes are designed to improve tax compliance, support specific groups, and provide relief for people who have been wrongfully imprisoned.

The Earned Income Tax Credit and Additional Child Tax Credit 

The most significant part of the PATH Act involves two major tax credits: the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). These are the credits that most commonly trigger PATH Act delayers, making them important for tax preparers to flag early in the season.  

Under the law, any tax return that includes EITC or ACTC, no matter how small the credit amount, will have the entire federal refund delayed until the IRS releases funds, typically around mid-February. Even if only part of the refund comes from EITC or ACTC, the IRS will not issue any portion of the taxpayer’s refund beforehand. This built-in delay gives the IRS additional time to confirm wage information and reduce identity theft and fraudulent refund claims.

The EITC was increased for workers with three or more children from 40% to 45% of earned income and reduced the marriage penalty by establishing higher phase-out thresholds for joint filers. It also simplified access to the refundable portion of the ACTC for lower-income families by lowering the cap to 15% of earned income over $3,000. The recent tax law changes in the One Big Beautiful Bill (OBBB) further expand eligibility for Earned Income Tax Credit and the Child Tax Credit (CTC) by adjusting income thresholds for inflation.

Work Opportunity Tax Credit

The PATH ACT also extended the Work Opportunity Tax Credit (WOTC). WOTC is a federal income tax credit available to businesses that hire individuals from targeted groups who have historically “faced barriers to employment”. These groups include:

• Veterans 

• Ex-felons 

• Recipients of certain public assistance programs 

• Qualified long-term unemployment recipients 

A qualified long-term unemployment recipient is defined as an individual certified by a designated local agency as having been unemployed for at least 27 consecutive weeks, including periods in which they received state or federal unemployment compensation.

Through WOTC, employers who hire individuals from these targeted groups may claim a dollar-for-dollar tax credit against the employer portion of Social Security tax liability.

Individual Tax Identification Numbers

Under the PATH Act, some taxpayers must renew their ITINs to file and avoid delays in receiving their refunds. Taxpayers must request a new ITIN if it has expired and must renew their ITIN if it has not been used in three years. To renew an ITIN, taxpayers must submit a completed Form W-7 along with the necessary documentation to prove their identity and foreign status.

Wrongful-incarceration Exclusion

The PATH Act introduced a provision that allows individuals who were wrongfully incarcerated to exclude certain payments from their taxable income. This exclusion applies to civil damages,restitution, and compensatory or statutory damages related to the wrongful incarceration. It also allows eligible taxpayers to claim refunds for taxes previously collected on these payments in earlier years.

The exclusion applies only to amounts received in connection with the wrongful incarceration itself, not to other unrelated settlements or income the individual may earn after release. Additionally, taxpayers generally must file a claim for refund within the statutory timeframe

Other tax breaks made permanent by the PATH Act  

Beyond refund timing and fraud-prevention measures, the PATH Act also made several valuable tax credits permanent.

• American Opportunity Tax Credit – A partially refundable tax credit for qualified higher‑education expenses, the AOTC helps students and families offset tuition, books, and related costs during the first four years of postsecondary education. 

• Computers Eligible for 529 Plan Distributions – The PATH Act clarified that computers, software, and related equipment count as qualified expenses when paid with 529 plan funds. 

• Educator Expense Deduction – This deduction allows teachers and eligible school staff to claim a deduction for out‑of‑pocket classroom expenses. Making it permanent ensures consistent relief for educators who regularly purchase supplies for their students. 

• Electric Vehicle Recharging Equipment Credit – This credit supports individuals and businesses installing charging equipment for electric vehicles, encouraging cleaner transportation options, and easing the cost of adopting EV technology. 

• Mass Transit Exclusion – The PATH Act permanently aligned the tax‑free transportation fringe benefit for mass transit with parking benefits. This matters for employees who rely on public transportation, making commuter benefits more equitable. 

• Mortgage Debt Forgiveness – Homeowners who experienced foreclosure, loan restructuring, or mortgage forgiveness can exclude certain canceled mortgage debt from income 

• Qualified Charitable Distributions from IRAs – This provision allows taxpayers aged 70½ or older to donate directly from an IRA to a qualified charity without counting the distribution as taxable income. It’s a valuable strategy for retirees managing required minimum distributions (RMDs). 

• State and Local Sales Tax Deduction – Taxpayers can choose to deduct state and local sales taxes instead of income taxes, which is particularly useful for those in states without a personal income tax. 

What do tax preparers need to know about the PATH Act?

As a tax preparer, you need to understand how the PATH Act affects refund timing, refundable credits, business incentives, ITIN rules, and partnership audits. Below are some of the areas most likely to impact your day‑to‑day work with clients.

• Delayed refunds for early filing clients who qualify for the EITC or ACTC: The EITC and ACTC provisions will be relevant for most tax preparers as these tax credits are extremely common. If you have clients who file early and qualify for the EITC or ACTC, be sure to let them know they will not receive their refund until after February 15, no matter how early they file. You can also direct them to the IRS’s Where’s My Refund? page for updates on the status of their refund.  

• Work Opportunity Tax Credit for target groups: If you have business clients, ask if they hire from any of the target groups specified in the Work Opportunity Tax Credit.   

• Wrongfully incarcerated clients: Most tax preparers won’t need to know the details of the wrongful incarceration exclusions. If, however, you do have a client who was once wrongfully incarcerated, you will want to review the tax exclusions stipulated in the PATH Act.   

• Individual Tax Identification Numbers: ITINs are only for resident and nonresident aliens and their families who do not qualify to get a Social Security number. If you serve any clients who use ITINs, make sure they are aware of the renewal requirements.  

• The PATH Act shifted the audit treatment of partnerships: The PATH Act made changes to the way Partnerships and Partners are treated when the entity is audited. It repealed the audit regime for partnerships. This change allows a partnership to make an election to have the partnership treated a certain way in the event the entity is audited. The PATH Act changed the burden of any tax deficiencies to the partnership and away from the partners. This is the opposite of how it was before this PATH Act provision went into effect. 

PATH Act penalties for incorrectly claimed credits

Under the PATH Act, if your client claims a refundable credit that’s more than what they owe in taxes, they could face a costly penalty. The law removed an existing exemption from these penalties for mistakes related to refunds and credits associated with the earned income tax credit. As the tax preparer, you can help by accurately preparing your clients’ taxes using TaxSlayer Pro software, ensuring they maximize their refund while avoiding costly errors.