IRS prepares for flood of last-minute returns

The Internal Revenue Service is getting ready for an onslaught of tax returns arriving by Tax Day on Monday, though many taxpayers will be eligible for automatic extensions due to natural disasters across the country.

The tax deadline is April 15 for most taxpayers, but those in Maine and Massachusetts will have until April 17 because these states observe the Patriots' Day holiday on April 15 this year and April 16 is the Emancipation Day holiday in the District of Columbia. Other taxpayers in disaster areas, certain active-duty military members and citizens living abroad automatically get more time to file.

The IRS estimates that 19 million taxpayers will file for an extension this year. The service has already received over 100 million tax returns, and tens of millions more are expected to be filed as Tax Day approaches. For the week ending April 5, the agency reported that it has received 101,849,000 tax returns, an 0.5% increase over the same time period last year. The number of returns processed was 100,110,000, or 0.3% less than the comparable period last year.

"Delivering tax season is a massive undertaking, and we greatly appreciate people in many different areas working long hours to serve taxpayers as the tax deadline approaches," said IRS Commissioner Danny Werfel in a statement Friday. "This effort reaches far beyond the IRS and includes hard-working tax professionals, software providers, the payroll community as well as our colleagues in the state tax agencies. Their work helping taxpayers makes a difference." 

He noted that millions of taxpayers across the nation will be working on their tax returns during the final hours. There are various free tools on IRS.gov to help answer basic tax law questions, provide free filing options, update refund status and even provide ways to request an extension for more time to file. The IRS has also expanded its special assistance for taxpayers through the final weekend of tax season with special Saturday hours at 70 Taxpayer Assistance Centers.

Samuel Corum/Bloomberg

This year's tax season has gone relatively smoothly, thanks to the lack of major changes in the tax laws. The tax extenders legislation that passed in the House in January has so far remained stalled in the Senate amid growing opposition from Republicans on the Senate Finance Committee. It could have meant some mid-tax season adjustments by IRS programmers in how much could be claimed on the Child Tax Credit and revived a number of expired business tax breaks, with a flood of amended returns sure to follow. But without those changes, and many of the pandemic tax breaks lapsed, tax professionals got to experience a more normal tax season.

The IRS is still able to draw on the expanded funding it received from the Inflation Reduction Act of 2022 to improve its technology and customer service, although the $80 billion appropriated over a decade has since been reduced by around $20 billion. Of the $60 billion in long-term modernization funds provided by the Inflation Reduction Act, through 2023 the service had spent about $4.4 billion, mostly on taxpayer services and operations support.

Tax professionals have noticed the difference. "I would say that overall things are better, " said Eric Bronnenkant, director of tax at investment advisor Betterment. "Obviously, if you compare them to during the pandemic, when they passed all these stimulus payments and all sorts of special provisions due to the pandemic, that definitely made things a lot more complicated. While I know that there are many people who miss some of those special pandemic provisions, the fact that we've gotten back to a more stable, normalized level has arguably made the overall tax-filing season smoother, but not perfect."

The deadline for claiming one of those pandemic tax breaks — the Recovery Rebate Credit — is about to expire on May 17.

"The May 17, 2024, deadline is fast approaching for taxpayers who have not yet filed a 2020 tax return to claim a refund of withholdings, estimated taxes or their 2020 Recovery Rebate Credit," wrote National Taxpayer Advocate Erin Collins in a blog post Thursday. "The IRS estimates that almost 940,000 of the nation's taxpayers have unclaimed refunds totaling more than $1 billion for tax year 2020 and encourages eligible non-filers in 2020 to claim their Recovery Rebate Credit before the May 17 deadline."

Taxpayers may still face some hurdles this tax season, especially if they worked in multiple states last year. "That's an extra challenge, particularly for road warriors who could be filing in five or more states, depending on how many places that you've worked and what those specific state rules are," said Bronnenkant. 

He often gets questions from clients about filing for tax extensions as the deadline approaches.

"An extension to file is not an extension to pay," said Bronnenkant. "You're still expected to pay what you think that you owe when you file right now, or when you file for an extension. That doesn't give you any more extra time to pay. It just gives you extra time to gather all your information. You still want to make the best guess of what you think you're going to owe and pay that now."

The same holds true for individual retirement account contributions; taxpayers who want to set aside money for retirement can make up to $6,500 in IRA contributions if they're under the age of 50, or $7,500 if they're over age 50, up until April 15.

"Even if you're on an extension, that doesn't give you any extra time to contribute to your traditional or Roth IRA," said Bronnenkant. "Maximizing those tax-advantaged accounts is definitely on the top of people's minds for sure."

There are some exceptions for self-employed pension plans and the SEP IRAs associated with them. "For some self-employed people, they may also have a SEP," said Bronnenkant. "For the SEP, if you're on extension, you can actually contribute until October 15, so that gives you extra time. The rules for that are a little bit different than the traditional and Roth."

Direct File

Some taxpayers are bypassing their tax preparers and trying out the IRS's new Direct File free tax software that's being pilot tested for those with simpler returns in 12 states — Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming. The IRS launched the program last month and it's seeing steadily increasing usage, recently adding a new feature in recent days to automatically import a taxpayer's adjusted gross income information from last year's tax return.

The IRS hopes to expand the pilot program next year more widely with additional features, assuming the program isn't shut down by Congress or the next administration after the November elections. 

"We are actually doing some more user research right now with Spanish-speaking filers," said Ayushi Roy, deputy director of New America's New Practice Lab, which helped carry out a feasibility study for developing the Direct File system. "We don't have a clear sense which tax scenarios ought to be prioritized if this is continued. We might find that something like student loans is actually maybe a scenario to cover, or joint filing or shared custody. We don't have that information yet. There's sort of a top 10, but whittling it down is still a work in progress."

Even if the Direct File program continues, she doesn't see that as a threat to professional tax preparers.

"Last year, of the 162 million returns that were filed, 150 million were electronically filed, and more than half of that, 85 million specifically, were filed by tax professionals," said Roy. "That's a higher ratio of preparation by professionals than self-preparation by software than previous years. That trend is actually really interesting and I am interested in seeing how that figure ultimately lands this year. It is worth noting, though, it will be hard to evaluate by April 15 because we have so many natural disaster-related extended filers, particularly in California and some other states that dealt with fires and flooding in the past filing year, so I don't know how much we'll be able to tell from the data after the 15th versus data in the fall."

There will still be a place for commercial tax software as well, and some of the vendors in the Free File program and beyond seem to be lowering their eligibility requirements.

"The Direct File program is not in the business of taking over the process of tax preparation," said Roy. "The tax preparation landscape is rightfully varied, with lots of options for different people that work for different situations. That's the right way for the landscape to exist. The purpose of the Direct File program was an effort to fill a gap in an existing market, and if that gap can be filled through other means, including lifting income eligibility restrictions in TurboTax and H&R Block, that to me feels like a win."

The Treasury Department provided an update Friday on the progress of the Direct File program. "In the four weeks since the IRS launched Direct File, we've seen steadily increasing interest from taxpayers in using this new free tool," said a U.S. Treasury official in an email. "Each week, we saw steady growth, including several days in the final full week of the filing season with more than 5,000 returns accepted each day."
 
Taxpayers using Direct File have claimed more than $50 million in refunds. California, Texas, Florida and Washington have the highest number of accepted returns to date, according to the Treasury. Since the launch, taxpayers have used the program's live customer support service over 25,000 times. Average wait times for assistance consistently ranged between 10 and 20 seconds overall, and between one and two minutes during times of peak usage.

"Use of live customer support picked up this week, with taxpayers using support nearly 8,700 times, with eligibility being the main topic of conversation," said the Treasury official.

Eligible taxpayers in all 12 pilot states can file their tax returns using Direct File until 11:59 p.m. on April 15. Eligible taxpayers in Massachusetts will be able to use Direct File until the 11:59 p.m., April 17, deadline to file in that state. Taxpayers in all 12 pilot states who tried to file using Direct File, but whose returns were rejected, have until 11:59 p.m. on April 20 to fix their rejected returns.