This year's tax season, the first post-COVID, began on Jan. 23 with anticipation of a return to normal.
Tax preparers went in with two hopes, according to Roger Harris, president of Padgett Business Services and former chairman of the Internal Revenue Service Advisory Council: "The first is that we're back to normal, whatever that means in a post-COVID world," he said. "Second is that because of new hires and understanding at the IRS, the problems we had in the past will be a thing of the past. The IRS already had new hires in the mix before the Inflation Reduction Act, so there should be 5,000 additional personnel on board by President's Day. Hopefully, this will make for a better experience for everybody."
"There's really not a lot of new legislation, and most of the COVID-related legislation is gone," he remarked. "So we're back to the triangle of clients, tax preparation and the IRS, and hopefully we'll all do our jobs well this year."
"The service has been onboarding staff, working through the backlog, and improving its technology," said Chad Hooper of the Professional Managers Association, a group of IRS managers. "As the most recent National Taxpayer Advocate report illustrates, these efforts have resulted in notable improvements to taxpayer services. But we all know issues persist."
One result of the end of COVID-related benefits will be smaller refunds this year, according to the IRS and tax professionals. Taxpayers will miss the stimulus payments that many received as a rebate credit that was given, in essence, as a tax refund. Moreover, the expanded Child Tax Credit is dropping back to its prior levels.
Shifting laws
"Families with dependents may see smaller refunds on their 2022 returns because the 2021 tax law changes that expanded child-related credits have now expired," observed Tom O'Saben, director of tax content and government relations at the National Association of Tax Professionals. "For instance, the 2021 Child and Dependent Care Credit increased to $8,000 for one child. In 2022, the credit reverts to 2020 levels (adjusted for inflation). The dollar limit for eligible expenses is $3,000 for one qualifying individual or $6,000 for two or more."
"The Inflation Reduction Act extended the $500 lifetime limit for energy improvements on a personal residence for one year, that year being 2022," O'Saben noted. "That lifetime limit still applies for 2022, but is enhanced beginning in 2023. We should ask clients if they replaced a water heater or furnace with a new high-efficiency appliance so they can count it toward their lifetime limit. And if they contemplate any further improvements, they should know about the enhanced, yearly credit available in 2023."
An example of the savings possible, according to O'Saben: Say a taxpayer contemplates replacing all the windows in their house at a cost of $40,000. If the work is done in one year, the credit is capped at $1,200. However, if they spread it out they can get $1,200 for each year in 2023, 2024 and 2025. Exterior windows and doors are the best example of something that can be done gradually to spread out the credit — items such as a furnace can't be spread out.
Taxpayers who took a qualified COVID-related plan distribution in 2020 have three years to reinvest part or all of it into another qualified plan. If they took the distribution on Oct. 1, 2020, the reinvestment period began the day after, on Oct. 2, 2020. So the end of the three-year period is Oct. 2, 2023.
For example, if the taxpayer took a COVID-related distribution on Oct. 1, 2020, of $100,000 — the maximum they could take — the taxpayer had the option to report it all in the year received or it would be included ratably over a three-year period. If the taxpayer received an inheritance of $50,000, they have the option of reinvesting it in another qualified retirement plan before Oct. 2, 2023. The taxpayer could then file an amended return for 2020 and reduce the income by the $50,000 that was reinvested.
"It could be a lightbulb moment where the taxpayer tells you, 'Well, my aunt died,' and they had taken the distribution in 2020," suggested O'Saben.
He advised preparers to use the file-optimization tool that most software packages have to see if a couple should file jointly or as married filing separately. "There are circumstances where it may be beneficial to file separately," he said.
The ERC holds on
The Employee Retention Credit is one of the last remaining COVID-related programs that is still available, remarked Harris. "It could either present the opportunity to still get credits for some, or challenges for those that have already received their money," he said.
Employees that did not claim the ERC when it was offered can still amend their returns to take advantage of it, observed O'Saben. Employers who filed Form 941, "Employer's Quarterly Tax Return," in 2020 and 2021 have until the end of 2024 and 2025, respectively, to file amended returns that retroactively claim the credit. Once a business claims the ERC, they must amend their business return for the period claimed from 2020 or 2021 and reduce their wage expense by the amount of the credit.
The credit is available for wages through Sept. 30, 2021, observed Tim Speiss, tax partner in the private client services group at Top 100 Firm EisnerAmper.
"In order to be eligible for the credit, the employer must satisfy one of the following conditions," he said:
As a result of COVID-19 the employer was required to fully or partially suspend operations during any calendar quarter in 2020 or 2021 due to orders from a government authority limiting commerce, travel or group meetings; or,
The employer experienced a significant decline in gross receipts during the calendar quarter when compared to the same quarter in 2019; or,
They experienced a gross receipts decline of 50% in 2020 and 20% in 2021.
The ERC is being "way overmarketed," according to Ed Renn, senior equity partner at law firm Withers Bergman. "In many cases, third-party marketers are setting up potential problems for people that don't qualify. They're taking very aggressive positions that are probably not supported."
"The bottom line is that if you don't have a reduction in earnings and weren't shut down, you probably shouldn't be claiming the ERC," he warned. "They're taking some wacky positions. It's still possible to fix, but down the line I expect there to be significant investigations and audits. You can call it anything you want, but it's fraud."
Timing the filing
O'Saben takes issue with many advisors who urge taxpayers to file early. "I slightly disagree with that position," he said. "So many taxpayers want paperless statements. A lot of documents won't be mailed out because the taxpayer opted out of paper. A typical response from taxpayers when they hand you their information is, 'I didn't receive anything else.'"
To thwart criminals from receiving taxpayers' refunds ahead of the taxpayers' filing, he recommends use of the Identity Protection PIN available from the IRS to protect against fraudsters. The problem of tax-related ID theft has grown exponentially in recent years, according to John Gilmore, director of research for privacy security firm DeleteMe.
"Fraud organizations have professionalized and become technologically sophisticated and can now execute what used to be 'individual fraud' using breached data sets and online [personally identifiable information] to file thousands of fraudulent returns simultaneously with 'bots' — scripts that search for specific PII, fill in blanks, and can submit forms," he said. "The industry has become more vertically integrated, with specialists who each do OSINT [Open Source Intelligence gathering], packaging/selling of data, execution, and refund washing/debit card transfers."
"Any 'new programs,' 'new credits,' or politically charged new spending where there is incentive to rush money out the door via less secure agencies leads to targeted mass exploitation," he said.
