By Richard Rubin

WASHINGTON -- Federal tax refunds through early February dropped 78% compared with last year, thanks largely to a law requiring the Internal Revenue Service to delay checks to households claiming certain tax credits.

Refunds paid through Feb. 3 were $13.2 billion, down from $58.6 billion through Feb. 5, 2016. The average refund also declined, to $1,994 from $3,385. The data released Wednesday is the first year-over-year comparison showing the size of the decline.

The drop could temporarily slow retail sales and mortgage payments. That's because tax refunds are often the largest financial event of the year for low-income households, which make major purchases or use the refunds to pay off debts. Overall U.S. retail and restaurant salesin January and February 2016 totaled $814.48 billion, not adjusted for seasonal variations, according to the Commerce Department.

The 2016 data includes four more processing days, so perfect comparisons aren't possible, but the number of returns is down just 24%, far less than the drop in refunds.

The IRS delays should push some spending back into February and March without affecting overall sales, said Chris Christopher, director of consumer economics at IHS Global Insight

"Some of the spending that would have happened a little bit sooner, it will happen a little bit later."

The payments have become a tempting target for identity thieves and unscrupulous tax preparers, who falsify tax returns to get thousands of dollars.

So Congress passed a law in late 2015 forcing the IRS to hold back refund checks related to the earned-income tax credit and the child tax credit until at least Feb. 15. The delay will give the IRSmore time to match tax returns with income data on W-2s filed by employers. The nonpartisan congressional Joint Committee on Taxation projected the law would increase federal revenue by $779 million over a decade.

The IRS has told affected taxpayers that they shouldn't expect to receive their refunds until Feb. 27 because of weekends, holidays and bank delays.

In 2016, the IRS paid out more than 111 million tax refunds for a total of $317.6 billion.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

February 08, 2017 16:37 ET (21:37 GMT)

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