Tax Strategy: 2022 season postmortem

May 23, 2022 12:00 PM

It seems that there are two very different perspectives on the outcome of the 2022 tax filing season. From the Internal Revenue Service’s perspective, things seem to have gone reasonably well. Ignoring for the time being the backlog on 2020 tax returns, the IRS started the tax season on time and ended it on time for the first time in three years. It processed more returns by April 15 than it did in 2021, and issued more and larger refunds. The IRS was not interrupted midfiling season with additional legislation impacting the tax returns already being filed. The service hopes to catch up on 2020 tax returns by the end of 2022. We are not quite sure how the IRS is doing with 2021 paper returns, but it does continue to admit that it is suffering from inadequate funding, and finding that it is having some trouble attracting additional talent.

From the tax practitioner perspective, however, the tax filing season did not look so rosy. Ending the tax filing season on time was not necessarily a good thing. Yes, extending the filing season creates problems in terms of staffing and getting taxpayer information submitted in a timely fashion. However, returns were generally more complicated this year, with the expanded Child Tax Credit and advance payments, the continuing Economic Impact Payments and the Recovery Rebate Credit, the continuing charitable deduction for nonitemizers, the expanded Earned Income Tax Credit, the expanded Child and Dependent Care Credit, and virtual currency and nonfungible tokens. Tax return preparers continued to have issues dealing with unprocessed prior-year returns, the disconnect between IRS notices and previous submissions to the service either not received or not read, obtaining IRS transcripts in a timely fashion, and dealing with clients unfamiliar with some of the changes required by the 2021 tax returns. Anecdotally, it appears that the number of extension requests filed will be larger than ever, continuing a trend from past years.

Tax filing deadline

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While tax return preparers did not particularly love the extended tax filing deadlines in 2020 and 2021, the normal tax filing deadline in 2022 was probably worse given the added complexity of 2021 tax returns. It may be a mistake to talk about a postmortem on the 2022 tax filing season when many tax return preparers will still be working on filing tax returns through Oct. 17, 2022.

New credits and deductions

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Child Tax Credit. Tax return preparers had to ask clients for the new Letter 6419 documenting advance payments of the Child Tax Credit in 2021. Unlike the Economic Impact Payments, if a taxpayer received too much advance payments of the Child Tax Credit, it had to be repaid on the 2021 tax return, causing some clients to receive lower refunds than expected. Issues also had to be clarified between what the taxpayer thought they had received and what the Letter 6419 said that they had received. Tax practitioners also had to deal with the complexities where the taxpayer entitled to the child as a dependent varies from year to year.
Earned Income Tax Credit. The complexities of the EITC are always a problem since they often affect taxpayers least able to afford professional tax assistance. Also, changes to the EITC for childless individuals, for individuals with some investment income, for separated individuals, and for taxpayers with children who do not have Social Security numbers resulted in changes for many tax returns.
Child and Dependent Care Credit. The expanded Child and Dependent Care Credit also resulted in changes for many taxpayers. Lower- and middle-income taxpayers experienced a larger potential credit, while higher-income taxpayers may have found themselves no longer eligible for even a partial credit. Taxpayers unaccustomed to qualifying for the credit may have had difficulty obtaining the necessary taxpayer identification information from daycare providers to qualify.
Economic Impact Payments and Recovery Rebate Credit. Although similar to the situation of 2020 tax returns, 2021 returns could have been more confusing since some of the EIPs related to the 2020 tax return were received in early 2021. Taxpayers should also have provided their tax preparers with Letter 6475 to assist in calculation of the RRC. Of assistance to taxpayers, as was the case on 2020 returns, if the taxpayers received larger EIPs than they are entitled to as an RRC, they generally can keep the difference.
Charitable deductions. As was the case on 2020 tax returns, tax return preparers had to deal with taxpayers who do not itemize being entitled to up to a $300 charitable deduction on the 2021 tax return. For the first time on 2021 tax returns, the deduction was after adjusted gross income, rather than before, and was doubled to $600 for joint filers. Taxpayers unaccustomed to retaining charitable contribution records had to try to put together additional charitable contribution information for their tax return preparers.
Business meals deduction. Businesses for the first time on 2021 tax returns were entitled to a 100% deduction for both food and beverages if provided by a restaurant. This required businesses to distinguish between meals provided by a restaurant and business meals still subject to the 50% deduction limit.

Cryptocurrency and NFTs

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Although there was a question on the 2020 tax return about virtual currency transactions, it was modified on the 2021 return, requiring potentially a different answer. The growth of taxpayers engaged in cryptocurrency transactions and the growth of investment in nonfungible tokens created more work for taxpayers and tax preparers. The IRS identified this area as an audit focus due to perceived noncompliance. The service has not yet specifically addressed NFTs, requiring tax preparers to evaluate if they should be treated similarly to cryptocurrencies.

IRS notices

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The IRS did try to respond to the concerns about computer-generated notices being issued when the service was still trying to wade through previously submitted tax returns and other correspondence. It ceased issuing notices about unfiled returns where tax payments had been processed. However, it indicated that other notices could not be suspended because the changes could interfere with software important to tax return processing or that statutory requirements prohibited it from suspending some notices.

IRS funding

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The IRS did receive some additional funding in the last budget and anticipates some further expansion of funding in the current budget proposal, but the significant bump in funding proposed in the Build Back Better plan has not yet happened. The service is trying to add additional agents; however, it is finding its current pay scale is not keeping up with wage inflation in the general economy.

IRS backlog

An IRS office building in the East Harlem neighborhood of New York

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The IRS hopes to clear up its backlog of 2020 tax returns by the end of 2022, though many tax practitioners remain skeptical. The service may also have trouble handling 2021 paper-filed tax returns and a larger-than-expected number of 2021 tax returns filed on extension. Also, while the IRS has been relatively free of complicating tax legislation through the early part of 2022, that could change if a reduced version of the Build Back Better plan emerges before the 2022 elections. The service is attempting to increase staff and Congress is attempting to increase IRS funding, but that may not happen in time to solve the backlog problem as soon as the IRS hopes.