Tax season: What the IRS says clients and advisors can expect

Taxpayers can expect a smooth filing season despite monumental challenges in getting pandemic relief to millions of people, according to the nation’s top tax official.

IRS Commissioner Charles Rettig told a virtual event held Jan. 17 by the New York City Bar Association that the annual season “is going seamless.” With two rounds of stimulus checks already sent out and a third tranche on tap under President Biden, Rettig said that “we still are in the trenches, moving through.” He added, “I’m not going to say we have our hands full — we’ve got this."

Bloomberg News

The IRS opened the annual tax filing season on Feb. 12, after pushing back its traditional start in late January to cope with sending out the latest round of stimulus checks to Americans and to accommodate regulations related to the two pandemic relief bills. Rettig said that on opening day, the agency processed 13.5 million returns.

The nation’s tax collector, long the butt of criticism for its glitchy work in prior years, has had its workload doubled with the relief payments, which it’s responsible for getting to taxpayers. The second, most recent stimulus package, approved last December, sent up to $600 to taxpayers (up to $1,200 for married couples) over January and February, plus an extra $600 for children. The first package, part of the giant Coronavirus Aid, Relief, and Economic Security (CARES) bill passed last March, sent up to $1,200 (up to $2,400 for married couples), depending on their income in 2018 or 2019, plus an extra $500 for each child.

More changes might emerge from Biden’s proposed plan, a $1.9 trillion package, with $1,400 stimulus payments ($2,800 for married couples), that is working its way through Congress and is expected to land on the president’s desk for signature by March 14.
Payments under Biden’s plan would have a new formula and yet-to-be-decided income limits at which they would phase out, both of which can proportionally alter the amount taxpayers would receive compared to their previous checks.

Separately, Democratic lawmakers have proposed legislation that would erase the taxes owed on up to $10,200 in unemployment benefits for this filing year, but it’s not known if that would make its way into Biden’s package — and thus into tax regulations that the IRS will have to deal with.

Snafus
Last year’s filing season got hammered by delays and glitches caused when the pandemic first unfolded and IRS offices closed their doors, sending tens of thousands of employees home.

Rettig criticized reports of delayed payments in the first stimulus round that began last March. The agency ultimately sent out 160 million stimulus payments totalling $280 billion, but not before snafus that included sending money to dead people.

The COVID-driven hurdles pile on top of a host of perennial challenges to the underfunded, understaffed agency. Rettig said he had met with Treasury Secretary Janet Yellen and that he predicted increased funding and “radical increases” in IRS staff over the next three years “thanks to the bipartisan environment.”

Separately, the IRS is battling mounting scams, some involving “ghost” preparers who don’t sign a client’s return as required by law, as well as identity theft and fraud with the Earned Income Tax Credit, a roughly $62 billion annual program that each year pays out in error around one-fourth of its money due to fraud and mistakes by claimants.

Saddled with legacy computer systems dating back to the 1950s, it’s still dealing with a backlog of unprocessed returns from last year, for which the filing date was extended to July 1 from the traditional April 15 amid the pandemic. As of Jan. 29, the agency had still not processed 6.7 million individual returns filed last year.

Backlog
Rettig didn’t address the lingering backlog, saying only that for 2019, the agency had processed 163 million individual returns and 125 million refunds, with the average refund totalling $2,500.

A former tax lawyer in Beverly Hills, California, who defended people and companies against the IRS, he has headed the agency since he was appointed by President Trump and later confirmed by Congress in October 2018.

Financial advisors are scrambling to get their clients’ tax bills in order, with the IRS expecting to receive more than 150 million individual returns this year, most before April 15. The IRS website says that “COVID-19 continues to cause delays in some of our services,” including live phone support, processing of paper returns and “reviews” of both paper and electronic returns.

Tax preparers fear that things might get worse with the coming new round of relief.

Stimulus payments aren’t taxable, as Intuit's TurboTax explains. They are credits, which lower a federal tax bill dollar for dollar. People who didn’t get any prior payments or reduced ones, because their 2019 income was too high, but whose income has since fallen, may be able to "back” claim them this year as a "recovery rebate credit” when they file their federal returns for 2020 come April 15. People who got too much don’t have to repay the money.

It’s unclear whether the IRS expects stimulus payments under Biden’s expected package to figure on a taxpayer’s 2020 return or instead on the 2021 return. The upshot is if the agency resolves that question after April 15, and you’ve already filed, you will have to file an amended return.

Rettig said that instead of being frustrated by delays and snafus, taxpayers should be grateful. His “only ask,” he said, is “a simple thank you…we had a rough year, you had a rough year...our people don’t get a lot of appreciation.”