The tax-filing season is now underway after a delayed start, and it’s expected to bring challenges and confusion as taxpayers and the IRS navigate pandemic-related issues, including some pertaining to stimulus checks.
The IRS started accepting 2020 tax returns on Friday, a couple of weeks later than the usual, after a coronavirus relief law was enacted in late December.
Many Americans saw significant changes to the amount and sources of their income last year because of the pandemic, and they will have to file returns that take those into account.
People who have not received any or all of the funds that they’re entitled from the two rounds of stimulus payments can reconcile that on their 2020 return.
“2020 was kind of a year for the ages and all the life experiences it took with it,” said Mark Steber, chief tax information officer for the tax-preparation company Jackson Hewitt. “There’s a lot for people to watch for on their taxes, and a lot to watch out for.”
The IRS is expecting to process around 160 million individual tax returns this year. The agency said it’s prepared for the influx.
“We are ready,” Ken Corbin, a senior IRS official, said on a call with reporters Thursday.
The IRS is encouraging people to file their tax returns electronically and to use direct deposit for refunds. While the agency expects to issue most refunds within 21 days of receiving a return, as is typical, Corbin said people who file by mail should prepare for “potential lengthy waits” on any refunds.
“This is due to the impact of the pandemic, ranging from potentially lengthier mail time to the need to socially distance our employees in our processing sites,” he said.
This year’s filing season is taking on added importance for people who have not received the full amount of the enacted stimulus payments. Eligible recipients who fall into this category include some taxpayers who saw their income decline substantially in 2020, people who welcomed new children last year and families with mixed-citizenship status.
Steber said the number of affected Americans is in the millions.
Taxpayers who have not yet received their full payment amounts can claim the difference between what they have received and what they are entitled to as a “recovery rebate credit,” which is line 30 on the 2020 tax return. People who have already received their full payment amounts don’t need to take any action.
The start of the filing season comes as Congress is considering legislation that would create an additional round of direct payments. Under the bill’s provisions, individuals with income of up to $75,000 and married couples earning up to $150,000 would be eligible for the full payment amounts of $1,400 per person. If the legislation is enacted, the initial payments would be based on income listed on 2019 returns, or 2020 returns when they’re processed by the IRS.
The potential for a new round of direct payments may influence the timing of when some file their 2020 tax returns. Some people whose income was lower last year than it was in 2019 may want to file their return on the early side to maximize the payment they could receive quickly. On the other hand, those who saw their income go up in 2020 may want to wait to file their returns so that they can potentially receive a stimulus payment based on their 2019 income.
Corbin said it’s more important to file tax returns accurately than it is to file them quickly and that people should wait until they have all the necessary documents in hand.
“We always encourage taxpayers to file the most accurate return that they can,” he said.
Stimulus checks aren’t the only aspect of pandemic-related assistance that may complicate the tax-filing season.
Millions of Americans received unemployment benefits last year due to the economic downturn. People often received the traditional state unemployment benefits, as well as benefits from federal programs.
Tax preparers said it may be complicated for people to receive all of the tax forms pertaining to their unemployment insurance. In some cases, people who received benefits from multiple programs may get one form from their state, while in other cases they may get multiple documents. Additionally, some people will have to download the tax forms from state websites.
Unemployment benefits are considered taxable income by the federal government and many states. However, many people were likely unaware of that and had little to no taxes withheld from their benefits. That gap could lead to smaller-than-expected refunds or even balances due to the IRS.
People who paid too little in taxes throughout last year could face penalties when they file their return this year. Corbin said that the IRS doesn’t have any current plans for blanket waivers of underpayment penalties relating to unemployment benefits but that the IRS is able to provide relief for taxpayers facing hardships on a case-by-case basis.
A group of Democrats have introduced a bill that would exempt from federal taxes the first $10,200 in unemployment benefits people received last year, but it’s unclear whether the measure will make it through Congress. The bill’s contents are not a part of the current version of House Democrats’ relief package.
Adam Markowitz, a Florida-based enrolled agent who prepares individual and business tax returns, said the uncertainties over what will ultimately be in the next relief package make him inclined to not start filing many of his clients’ tax returns immediately. He also said there are business owners who may still be waiting for IRS guidance about how relief programs for businesses enacted last year will impact their personal taxes.
“The biggest thing is we don’t know what we don’t know,” he said.
State taxes are likely to prove challenging for many people this year. In some cases, people who worked in a state different from the location of their office could end up having to pay taxes to more than one state. Rules for taxing nonresidents vary from state to state.
“More than likely, we will have to file multiple state returns for people who worked from home, and their home was in a different state from their job,” said Ty Gaines, a Virginia-based enrolled agent.
Last year, the IRS extended the tax-filing due date from April 15 to July 15 because of the pandemic. The agency has no plans to take similar action this year, though as is typical people can request a six-month extension to file their returns.
“Right now, we are not planning any administrative extensions beyond the April 15 normal deadline,” Corbin said.
The IRS has seen its funding level decline significantly over the past decade on an inflation-adjusted basis, and many lawmakers and tax professionals would like Congress to substantially boost the agency’s budget. The National Treasury Employees Union (NTEU), which represents IRS employees, used the start of this year’s filing season to call for increased IRS funding.
“NTEU has full confidence that IRS employees will deliver, again, a successful filing season,” the group’s national president, Tony Reardon, said in a news release. “They do so, however, stretched far too thin.”