As the tax return season pivots from bad to worse, it’s impacting affluent investors in unpleasant ways.
One taxpayer will likely wait up to 18 months for a $400,000 refund. Another, whose accountant faxed documents to the IRS last March, heard only recently from a work-from-home auditor for the agency that it hadn’t received the papers. Some high earners who filed returns for trusts several years back are now getting rogue notices asserting that they skipped out on the required mailings — as some of those returns languish unopened in an IRS warehouse in Utah.
“This is creating anxiety for many clients who take their tax obligations seriously,” said Glenn Ullmann, the president of Ullmann Wealth Partners, an independent financial advisory firm in Jacksonville Beach, Florida, that caters to high net worth clients.
Even before the third pandemic filing season opened on Jan. 24, it already spelled “nightmare” for more than the 160 million individual taxpayers who will file federal returns this year.
How to ‘dig out’
National Taxpayer Advocate Erin Collins, the IRS’s official watchdog, warned on Jan. 12 in her annual
Still more fuel for what one advisor early on called a “
“I don’t know how they’re going to undig and get out of this mess,” said Jody Padar, the head of tax strategy at April Tax Solutions, a start-up for return filing that partners with financial institutions.
The IRS is grappling with a pandemic-fueled manpower shortage, aging technology, funding shortfalls and two multibillion-dollar pandemic-related relief provisions — the advance child tax credit and a pause on student loan payments. But it's not just average earners, who benefit the most from those one-off measures, who may see their refunds delayed. The nation’s tax collector has said it will issue most refunds in
Last month, the agency announced that it would
The issue, Greenberg said, was that in March 2021, he had faxed to the agency documents supporting the client’s return filed last year. But last May, he said, an IRS auditor who “goes in one day a week and works remotely the remaining four days” told him that the fax hadn’t been received. Last month, the client got an overdue tax bill from the agency for $40,000 — a sum Greenberg disputes. The problem, Greenberg said, is that the agency’s backlogs and confusing and errant mailings make it difficult to resolve things. It’s not clear if IRS employees who work remotely have access to the agency’s full systems or paper returns.
Losses and limbo
Now many high net worth Americans are stuck, or about to get caught, in limbo. That’s because they tend to have a lot of losses they use to offset, or reduce, the taxes they paid in past years or owe in future years. If a prior federal return with a loss is still unprocessed, it can cause a current return that uses leftover chunks of that loss to be flagged as incorrect. If a current return applies a loss to prior years but is stuck in a processing backlog, it can delay a refund.
Under IRS rules, an investment loss of up to $3,000 can reduce income on which taxes are owed each year. Any leftover losses can be “carried forward” to offset income in a future year.
The rules for business losses are more generous. Before 2017,
But in 2020, to help pandemic-plagued businesses retain more cash, Congress changed the rules again, suspending those limits for net operating losses from business that are carried back or applied to 2018, 2019 and 2020. A net loss, which can be in the past or in the future, produces either a lower tax bill or a tax refund. In 2020, a then-record number of Americans
Padar said she had a client with a $90,000 business loss in 2020 that was reported on a return that was still stuck in the backlog. The client had a $100,000 profit last year, which means he owes tax on only $10,000 of the gain. If by the time he files his 2021 return this year, the previous year’s return hasn’t been processed, the IRS will show him as owing federal income tax on the full $100,000.
The due date this year is April 18, three days after the normal deadline due to a holiday in Washington, D.C. Taxpayers can file for a
Late is the new early
That’s goes against the “file early” mantra that many tax experts urge. But Padar said that her client could be on the hook for tens of thousands of dollars, at least in the eyes of the IRS, if it doesn’t clear its backlog by the time it tackles the new crop of returns. “He’s freaking out,” she added. Delays and snafus used to affect a taxpayer here or there, she said, but “now it’s so prevalent, you can have 20% of your tax department trying to resolve stuff that should have gone through.”
Chris Catarino, a certified public accountant and shareholder at Philadelphia-based accounting firm Drucker & Scaccetti, cited a client in the Northeast who owns real estate that had $1.1 million in depreciation in 2020. That sum offset the taxes on his approximately $100,000 in income that year, so it created a net operating loss of $1 million.
The client wants to use his loss to reduce the taxes he paid over 2015 through 2019, a legal move that would result in a $400,000 refund. But “the issue is that it takes so long for the IRS to generate refunds — it may take 18 months,” Catarino added that the uncertainty was affecting the client’s thinking about whether to invest in new properties. The IRS delays “affect his business planning; it’s a significant amount, but nobody’s really sure when he’s going to get it, so he can’t count on it or plan on it.”
Trusts, interrupted
Some affluent clients who file trust returns are also on edge. Those returns impact estate taxes, which kick in at a top 40% once a deceased taxpayer’s estate transfers more than $1 million to beneficiaries. For 2021, the transfers are exempt from the levy until the estate reaches $11.7 million (twice that for couples). Ullmann said that some clients had received IRS letters saying that their trust returns from 2019 and 2020 hadn’t been filed. They had, he said. But the agency only recently redeployed workers to its Ogden, Utah, center to process the documents, he said.
“The IRS computer system doesn’t know which returns are in the backlog when it sends out the automatic notice that a return hasn’t been received,” Ullmann said. “There have been additional delays of up to six months in receiving a refund for overpaid taxes, especially on the sale of a business.”
