This could be another rough tax season for the IRS and taxpayers. This year’s filing season opens January 24, 2022 (i.e., it is the first day the IRS will accept and start processing 2021 returns). However, the Service still has a backlog of prior year returns to process and is plagued by staff shortages due to the pandemic and reduced funding in the last few years. Even though most 2020 returns were filed electronically, many of those returns still required manual review, resulting in significant delays in 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 the 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, it is important to include the correct amounts received when doing the reconciliation to avoid return processing delays. In January, the IRS began issuing Letters 6419 (for the ACTC) and 6475 (for EIP #3) to taxpayers; these letters provide the information needed for making the reconciliation calculations. Be sure you provide these letters to your tax return preparer. Having an accurate tax return can avoid processing delays, refund delays, and later IRS notices.
Despite reduced staffing and the continuing pandemic, the IRS projects that for this tax season they’ll process electronically filed returns and pay refunds that are designated to be direct deposited in 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 that you’ll see your refund within that time frame. Suppose the IRS systems detect a possible error, missing information, or there is suspected identity theft or fraud. In that case, the IRS may need to correspond with the taxpayer, requiring special handling by an IRS employee. In that case, it may take the IRS more than the standard 21 days to issue any related refund. Sometimes the IRS can correct the return without corresponding, and the IRS will then send an explanation 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 doesn’t prevent taxpayers from filing their returns before then.
Taxpayers generally will not need to wait for their 2020 return to be fully processed to file their 2021 tax returns and can file when they are ready. So, 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. The best 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 the lack of enough IRS representatives to answer the phone in response to taxpayers’ questions. 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 – May 17, more than four times the number of calls in an average year. Alas, the Service was able to answer only about 10% of those calls, and callers who were lucky enough to have their calls answered generally had extremely long wait times before actually being able to speak with an IRS employee.
The IRS encourages taxpayers to go to the IRS.gov website to search for answers to their tax questions instead of calling the Service, but that often isn’t an adequate substitute for talking personally to a knowledgeable individual. Those who have their returns prepared by a tax pro have the benefit of being able to contact their tax professional with tax questions instead of being frustrated trying to reach or deal with the IRS. Given how understaffed the IRS is, it is more important than ever for taxpayers to have their returns professionally prepared.