This could be another rough tax season for the IRS and taxpayers. Although this year’s filing season opened January 24, 2022 (the first day the IRS accepted and started processing 2021 returns), the IRS has a backlog of prior year returns to process, and is plagued by staff shortages due to the COVID-19 pandemic and reduced funding in the last few years. Even though the majority of 2020 returns were filed electronically, many of those returns still required manual review, resulting in significant delays in the IRS issuing refunds. This was the case with millions of 2020 returns of taxpayers who received unemployment compensation and had filed before Congress passed a law that retroactively exempted up to $10,200 of 2020 unemployment income per filer (that provision has not been extended to 2021). Human review was also required for a significant number of returns on which the Recovery Rebate Credit had to be reconciled with Economic Impact Payments #1 and #2.
Similar issues are likely to affect 2021 returns, especially those where taxpayers received Advance Child Tax Credit (ACTC) payments and/or Economic Impact Payment #3, both of which must be reconciled on the 2021 return. Thus, to avoid return processing delays, it is important to include the correct amounts received when doing the reconciliation. In January, the IRS began issuing Letters 6419 (for the ACTC) and 6475 (for EIP #3) to taxpayers. These letters provide information needed for the reconciliation calculations, so be sure to provide them to your tax return preparer. Filing an accurate tax return can prevent processing delays, refund delays and later IRS notices.
Despite reduced staffing and the ongoing pandemic, the IRS projects for 2022 that they will process electronically filed returns and pay refunds designated to be direct deposited into the taxpayer’s bank account within 21 days of receiving the return. While this turnaround time can’t be guaranteed, the earlier you file, the better the chance of seeing your refund within that time frame. If the IRS systems detect a possible error, missing information, or there is suspected identity theft or fraud, the IRS may need to correspond with the taxpayer, requiring special handling by an employee. In that case, it may take the IRS more than the typical 21 days to issue any related refund. Sometimes the IRS can correct a return without corresponding, in which case they will send an explanation of the change(s) to the taxpayer.
To stop the filing of fraudulent returns, the IRS is prohibited by law from issuing a refund from a return where the Earned Income Tax Credit or Additional Child Tax Credit is claimed until after mid-February. However, that does not prevent taxpayers from filing their returns before then.
Taxpayers generally will not need to wait for their 2020 return to be fully processed in order to file for 2021. Therefore, if you filed your 2020 return, but the IRS has still not processed it, don’t let that stop you from preparing and filing your 2021 return.
Our advice is to not procrastinate in filing your return, even though the IRS may be bogged down.
In addition to return processing woes, the IRS has had customer service problems, specifically a lack of representatives available to answer taxpayers’ calls. Last tax season, because of COVID-19-related tax changes and staffing challenges, more than 145 million calls were received by the IRS phone system from January 1 to May 17–more than four times the number of calls in an average year. Alas, the IRS was able to answer only about 10% of those calls, and callers who were lucky enough to have their calls answered generally experienced extremely long wait times before speaking with an IRS employee.
The IRS encourages taxpayers to go to irs.gov to search for answers to their tax questions, but that isn’t always an adequate substitute for talking to a knowledgeable agent. Those who have their returns prepared by a tax professional have the benefit of being able to contact them with questions instead of frustratedly trying to reach the IRS. Given how understaffed the IRS is currently, it’s more beneficial than ever for taxpayers to have their returns professionally prepared.
If you are an existing client and have questions regarding your 2021 tax returns, or you are someone looking for professional preparation, please contact our office. We are here to assist you.