Refund delayed? Our ability to help may be limited.
Even though the 2021 filing season officially ended on May 17, 2021, as discussed in Part I, the IRS has reduced its tax year (TY) 2020 tax return inventory backlog down to about 10 million paper returns in need of processing, about 5.7 million returns in need of additional information from taxpayers before processing, and over 4 million are expected to be filed by the extended due date, October 15.
As we’ve discussed in 2021 Filing Season Bumps in the Road: Part I, the Where’s My Refund? tool and the IRS2Go app provide useful information when everything moves smoothly through the process. However, for those tax returns with processing delays, the tool and the app only inform taxpayers of three stages:
If you are one of the millions of taxpayers who filed your return and processing has been delayed (see discussion of potential delays: NTA Blog: Lifecycle of a Tax Return), the Where’s My Refund? tool or IRS2Go app do not provide any details beyond the fact that the return has been received. Many frustrated taxpayers continue to check the tool or app daily, waiting to see if the “return was received” status has been updated to “refund has been sent”, or regularly check their mailbox waiting for a letter from the IRS explaining the delay.
For those taxpayers still waiting for information regarding the status of their return, they can review the IRS’ Tax Season Refund Frequently Asked Questions, review their account, or call the IRS for an update, but this may be frustrating because its level of service on its 1040 line remains extremely low, at about 9 percent for fiscal year (FY) 2021 through September 11, 2021. Even if taxpayers reach an IRS assistor, the information they receive will be limited depending on whether the return has been posted, or the reason for which the return has been held. Typically, phone assistors don’t have any more information than what’s available on Where’s My Refund. As a result, the IRS encourages people to review its website and the Tax Season Refund Frequently Asked Questions.
Although several factors have constrained the IRS’s ability to quickly process backlogged inventory, it has fewer limitations with transparency and providing taxpayers regular updates on processing returns. Without more specific information on IRS tools or updates on its backlogged inventory, taxpayers are left wondering about their refund status, waiting for their refunds to arrive, or hoping to hear something from the IRS.
Even when taxpayers hear from the IRS, the information in the letter isn’t always clear and concise. For example, as I discussed in my Math Error Blog Part I and Math Error Blog Part II, math error notices don’t always clearly identify or explain the reasons for the adjustment to tax. In addition, as of September 2, 2021, the IRS had omitted the language providing taxpayers the right to request an abatement provided by the Internal Revenue Code. The information on the 60-day period for requesting abatement was absent in about 6.5 million math error notices, where the Recovery Rebate Credit was the only item at issue. Fortunately, the IRS plans to issue letters to these taxpayers including information about the 60-day abatement time period, which will restart the 60-day time period for requesting abatement from the date these letters are sent. The IRS expects to send these letters by October 1, 2021.
Although these and other notices are often confusing, it is critical – if you receive a letter from the IRS about your 2020 return, do not delay in your response, as that will only further postpone any potential refunds and may lead to more problems down the road.
Once a return has been processed, the IRS will use the return information to determine if a taxpayer is due an additional refund because they did not apply the unemployment income exclusion on their return, or because they paid the excess advance premium tax credit (APTC), which were both items addressed in a bill passed by Congress in the middle of the filing season. Further, the IRS will use the amount of income on the recently processed 2020 return to determine if the taxpayer is eligible for Economic Impact Payment (EIP) 3, an increased amount of EIP 3, or an adjustment to their APTC payment.
As I discussed in a prior blog, 2021 Filing Season Bumps in the Road: Part II, the passage of the American Rescue Plan Act impacted the taxability of unemployment compensation and excess APTC repayments. The law created a partial exclusion to the taxation of unemployment benefits, providing that the first $10,200 of these benefits received in 2020 are exempt from taxation ($20,400 for married couples filing joint returns) if the modified adjusted gross income (AGI) is less than $150,000. It also suspended the requirement that taxpayers increase their tax liability by all or a portion of their excess APTC for 2020 tax returns. However, by the time this legislation was signed into law March 11, 2021, nearly half of all 2020 individual income tax returns had been filed with the IRS. Thus, many taxpayers had filed and paid tax generated by the unemployment income or had repaid the excess APTC. Fortunately, the IRS programmed its systems to systemically refund these amounts to taxpayers.
In May 2021, the IRS began issuing the payments and as of September 3, 2021, the IRS has processed a total of about 13 million accounts to reflect the exclusion of unemployment income and has also processed about 1 million accounts where the excess APTC was reported. The application of the unemployment income exclusion and/or the repayment of the paid excess APTC resulted in either a refund or payments being offset to outstanding tax or non-tax liabilities. It is unclear how many more accounts need to be adjusted, as there are still about 436,000 returns awaiting processing in the Error Resolution System (ERS) as of September 11, 2021, and the IRS won’t be able to determine if an adjustment is appropriate until ERS processing is complete.
Unfortunately, neither the Where’s My Refund? tool nor the IRS2Go app tell taxpayers if their systemic refund has been issued. The tool or app will only reflect the refund paid with the original filed return; they don’t reflect whether a subsequent systemically issued refund has been issued. Of course, calling the IRS is an option, but the level of service for FY 2021 through September 11, 2021 on the IRS’s 1040 line was only about 9 percent, so calling may lead to more frustration than answers.
Taxpayers can always check their transcript to see if the payment has been issued. If a taxpayer has an online account, they can sign in and obtain a copy of their transcript relatively easily by clicking on “get transcript.” However, as of August 2021, about 57 percent of taxpayers who attempted to access their online account were unable to do so. (A list of what taxpayers need to authenticate their online account can be found on IRS.gov.) Thus, a large number of taxpayers call the IRS instead of accessing information from their online account because they cannot complete the authentication process. The good news is by the end of the year, the IRS will be implementing Secure Access Digital Identity for online accounts, which has been shown to provide a higher rate of verification. But in the meantime, individual taxpayers are struggling to establish online accounts.
Taxpayers who don’t have online accounts can obtain their transcript by completing an online fillable form; the IRS states the transcript should arrive at the taxpayer’s preferred address in five to ten calendar days. Once a taxpayer receives their transcript, they can determine if a payment has been made by searching the transcript for the phrase “Refund Issued”.
Also, all taxpayers whose accounts are adjusted to reflect the exclusion of unemployment income or the repayment of excess APTC should receive a letter within 30 days of the adjustment, indicating their return has been corrected. If a refund is generated, payment is made either by direct deposit or a check mailed to the taxpayer’s last known address on file with the IRS.
Married taxpayers filing a joint return shouldn’t be surprised if the refunded amount is higher than what they anticipated. It is our understanding that to expedite systemic adjustments to a taxpayer’s return, the IRS made assumptions which may have resulted in some taxpayers receiving a benefit larger than what they were expecting. For example, if a taxpayer filed a joint return with their spouse, their joint modified AGI is less than $150,000, and they live in a community property state, $20,400 of their unemployment income may be excluded even if that income is from one spouse (i.e., the exclusion per individual is $10,200). The same calculation is being applied in non-community property states where the Form 1099-G, Certain Government Payments, is not available to the IRS, and thus can’t be used to verify the amount of unemployment income. It is our understanding that if a Form 1099-G is on file with the IRS, it will verify the exact amount of unemployment income received by both the primary and secondary taxpayers on the joint return.
Many taxpayers have been confused, as the IRS has not provided a breakdown or explanation as to why some taxpayers received the entire $20,400 exclusion for a joint return. I have encouraged the IRS to include an explanation of this calculation in the letter sent to taxpayers informing them of this adjustment or issue a FAQ on its website along with a press release. This will give taxpayers confidence that the refund amount is correct and that the IRS will not be requesting repayment of any additional unexpected amount. It is my understanding that the IRS will be providing guidance on this issue in the weeks to come.
Once a taxpayer’s 2020 return is processed, an adjustment may be made to increase the EIP 3 payment (called a “plus-up”), or the EIP 3 may be issued for the first time if the processing of the 2020 return meets the eligibility criteria. If there is an additional payment pending because of the processing of the 2020 return, the payment should typically be issued within about 2 weeks from the time the 2020 return is processed. Taxpayers can check the status of their plus-up payment on the IRS’s Get My Payment tool. For more information about plus-up payments, visit the IRS’s FAQ about EIP 3.
The EIP 3 isn’t the only thing that may be affected by the processing of a taxpayer’s 2020 return.
The first monthly payment of the Advance Child Tax Credit (AdvCTC) began on July 15, 2021. If a taxpayer’s 2020 return had not been processed by this time, the statute provided the IRS the ability to use the taxpayer’s 2019 tax return to determine eligibility. Once the 2020 return is processed, the IRS will use the information on that return to calculate or recalculate the AdvCTC. For example, if a taxpayer’s AGI was less in 2020, or they added a qualifying child on their return, future monthly AdvCTC payments will increase.
Conversely, if a taxpayer’s AGI increased in 2020, or they can no longer claim a qualifying child whom they claimed in 2019, their AdvCTC amount may decrease. Thus, taxpayers may notice an increase or decrease in their monthly AdvCTC once their 2020 return has been processed.
The good news is that the IRS will make the AdvCTC payment adjustment automatically.
The IRS explained this issue in their 2021 AdvCTC FAQs; taxpayers can determine their exact AdvCTC amount by using the IRS’s Advance Child Tax Credit Eligibility Assistant. Taxpayers should know that they can also adjust their adjusted gross income or number of dependents on the Child Tax Credit Portal, which will affect future monthly payments.
The bottom line is this: although it is understandable that the IRS is still processing returns, it needs to provide taxpayers with regular and updated information on the filing season, and, as resources allow, enhance tools to provide taxpayers with more specific information on the processing of their returns and status of their refunds. The IRS’s operational status webpage is a step in the right direction in providing some key filing season updates. We encourage the IRS to continue providing regular and frequent details throughout the year providing information and managing expectations for taxpayers as to timing of the processing of their returns, payment of refunds, and challenges facing both the IRS and taxpayers for the current filing season and subsequent filing seasons. IRS’s filing season notices also need to be clear, transparent, and detailed about the adjustments it’s making to taxpayers’ returns so taxpayers can understand what’s been done, why it’s been done, and be confident that it’s accurate. The IRS needs to provide taxpayers with the confidence that here in the United States we have a fair and just tax administration, and frequent and timely transparency is a key to this success.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.