The third tax-filing season to occur during the coronavirus pandemic is set to begin relatively soon. This will likely come with yet more frustration and uncertainty for taxpayers, as well as tax preparers.
Some things will return to normal. For example: For the first time since 2019, the individual tax deadline will return to its usual mid-April date. In addition, the IRS has stated that it has steadily been reducing its backlog of 2020 returns. However, the agency is facing additional challenges with also dealing with all this leftover paperwork. These include the problems of retroactive legislation and pandemic-specific changes in tax laws that will require extra attention from taxpayers.
Erin Collins, who leads an independent taxpayer advocate group within the IRS, had this to say: “The IRS is going to start the filing season in a hole.”
The IRS is Still Processing Returns
In late December, meanwhile, the IRS stated they were processing returns received before April of 2021. They were doing this to make sure they didn’t require special attention or contain errors. This meant, however, that as of December 18th the IRS still had 6.3 million unprocessed individual returns and 2.3 million amended tax returns to process. The agency also stated that those amended returns sometimes take more than 20 weeks, rather than the usual 16 weeks. They’ve cut their tally of returns requiring special handling from 9.8 million in May.
All processes at the IRS that require a human to do that job (paper returns, phone calls, correcting errors on return) seem to all be subject to major delays. In fact, many people in accounting jobs have decided that mailing letters to the IRS and waiting several months for a reply is preferable to waiting for hours on hold to speak with an IRS employee directly.
Checking For Discrepancies and Errors
Breaks created by congress in order to help people deal with the disruptions caused by the pandemic will cause extra work. The advanced payments of the child tax credit received during 2021 must be reflected on tax returns. People who were eligible for March’s 1,400 stimulus payment yet didn’t receive it can now claim it on their returns. The IRS will send notices to taxpayers in late January. These forms will display government records of how much people will receive in stimulus and child-credit payment in 2021. If those numbers don’t match what’s listed on tax returns, this can lead to processing delays. This is because the IRS has to address discrepancies and errors. This process may be particularly challenging for households that have now added children, or had significant income changes.
Filing electronically, using direct deposit, and making sure child-credit and stimulus numbers match the IRS notices are all actions to help to avoid slowdowns.
Employees at the IRS’ paper processing centers are still working under pandemic restrictions. This makes electronic filing more important. This adds another layer to the challenges the IRS is already facing. Some believe the IRS should take some of its new employees and redirect them, having them address chokepoints in tax filing. The majority of taxpayers are trying to comply despite difficulties, after all.
Changes in Tax Laws
Congress may still change 2021 tax laws retroactively. The stalled $2-trillion education, health, and climate change bill would increase the cap on state and local tax deduction. This would start with the 2021 tax returns that people are about to file. The IRS has announced that it won’t delay accepting 2021 tax returns. However, they delayed the deadline in 2020 to July 15th, and in 2021 to May 17th.
Congress is normally reluctant to change a prior year’s tax law after-tax filing has already started. This is due to the administrative burden on taxpayers and the IRS. However, in March of 2021, Congress retroactively lowered income taxes on unemployment benefits in 2020. In addition, the IRS issued nearly 12 million refunds to people who already filed and paid taxes on that income. They expect that work to continue into 2022.
Tax preparers generally advise people to file their taxes as early as they can. As most people do get refunds, filing earlier allows them to get the money sooner. Filing a legitimate return can also help in preventing an identity thief from stealing a taxpayer’s information. If you get information to your tax preparer earlier in the year, they’ll generally have more time to analyze this information and to help you.
The potential expanded tax break for state and local taxes, however, could give some people a reason to wait to file their returns.
The IRS may start accepting 2021 returns before Congress makes a final decision on what the 2021 tax code actually is.
While it’s a good thing that Congress is trying to help so many taxpayers by changing tax laws retroactively, the implementation of these changes is clearly problematic and painful to many.
The Coronavirus pandemic has led to a number of problems for the IRS and for taxpayers. Delays caused by errors and discrepancies as well as retroactive changes to the 2021 tax code will all contribute to tax season being particularly difficult and exhausting yet another year.
If you’re looking to lessen your tax bill going forward, reach out to us at Cornerstone Wealth and Tax Advisory Group. We offer services and products that may be able to help with this.