The third tax-filing season to take place during this pandemic is set to begin soon. This will most likely come with more frustration and uncertainty for taxpayers and tax preparers alike. Now it’s true, some things will return to normal. For example, for the first time since 2019, the individual tax deadline will return to its usually mid-April date. Additionally, the IRS has said that it’s been steadily reducing its backlog of returns from 2020. However, the agency is facing additional challenges whilst dealing with all this leftover paperwork. These problems include retroactive legislation and pandemic-related changes in tax law. To quote Erin Collins, the leader of an independent taxpayer advocate group that exists within the IRS: “The IRS is going to start the filing season in a hole.”
The IRS is Processing Returns
In December, the IRS stated that they were still processing returns received before April of 2021. They were doing this to ensure 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 over 20 weeks, rather than the expected 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 an actual human rather than a machine (paper returns, phone calls, correcting errors on returns, etc) are all being subject to major delays. In fact, many people in accounting positions have decided that mailing letters to the IRS and waiting literal months for a reply is preferable to waiting for hours on hold to speak directly to an IRS employee.
Checking For Discrepancies and Errors
Breaks created by congress in order to assist people in dealing with the disruptions caused by the pandemic will cause extra work. The advanced payments of child tax credit received in 2021 must be reflected on tax returns. People who were eligible for March’s 1,400 stimulus payment, but 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, showing how much people will receive in stimulus and child-credit payments in 2021. If those numbers don’t match with what’s listed on tax returns, this will lead to processing delays. This is because the IRS has to address errors like that. The process of doing so may be particularly challenging for households that now have added more children, or have had significant income changes.
Filing electronically, using direct deposit, or making sure child-credit and stimulus numbers march the IRS notices are all actions you can take to help prevent slowdowns. Employees at the IRS’ paper processing center are still working under pandemic restrictions. This makes electronic filing more important. This adds yet another layer to the challenges being faced by the IRS. Some believe the IRS should take some of its new employees and redirect them to address the chokepoints in tax filing. The majority of taxpayers are trying to comply despite the difficulties, after all.
Changes in Tax Law
Congress may still change 2021 tax laws retroactively. The stalled two trillion dollar education, health, and climate change bill would increase the cap on state and local tax deductions. This would start with the 2021 tax returns that people are about to file. The IRS has announced that it won’t delay accepting of 2021 tax returns. However, they did delay 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 season has already started. This is because of the administrative burden on taxpayers and the IRS. However, in March 0f 2021, Congress did retroactively lower income taxes on unemployment benefits in 2020. Additionally, the IRS issued nearly 12 million refunds to people who already filed and paid taxes on that income. And they expect that work to continue into 2022.
Tax preparers generally advise people to file their taxes as early as they possibly 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 have more time to analyze this information for the sake of helping 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 the 2021 tax code. while it’s good that Congress is trying to help many taxpayers by changing tax laws retroactively, the implementation of these changes is clearly problematic and painful for many people.
So, In Conclusion
The pandemic has led to numerous problems for both taxpayers and the IRS. Delays caused by errors and discrepancies, as well as retroactive changes to the 2021 tax code, will all contribute to tax season being extra difficult and exhausting for yet another year. If you’re looking to lessen your tax bill going forward, reach out to us here at Messina’s Wealth Management. We offer services and products that may be able to help you with this.