The Internal Revenue Service (IRS) is experiencing a ‘perfect storm’ of factors that are almost certain to lead to extensive delays in the processing of tax returns and, as a result, the delivery of refunds to taxpayers to whom funds are owed.
The Taxpayer Advocate Service, an agency within the IRS that is independent and serves as an ombudsman for taxpayers with the agency, indicated that 30-35 million tax returns requiring manual processing by IRS personnel are already backlogged as of the May 17th filing deadline.
The factors leading to this crisis include staffing challenges exacerbated by the COVID-19 pandemic; the complex and constant changes and revisions on tax treatment of emergency federal programs such as the Paycheck Protection Program (PPP); and taxpayer confusion about rebates and relief programs.
For example, the IRS has elected to manually review all tax returns in which a taxpayer marked a “Recovery Rebate Credit” in Form 1040. Early indications show that millions of taxpayers may have erroneously marked that line in their return, leading to massive slowdowns in processing.
In addition, the IRS is still working through 2.4 million paper returns that were filed for the 2019 tax year, which during the pandemic were stored in trailers awaiting review.
Key recommendations for taxpayers are to work with your CPA to file your return electronically; ensure that all recovery-related funds and rebates are accurately accounted for; and plan for a long wait when it comes to processing and ultimately, any refunds due.
Finally, one key piece of advice that is sound in any tax year: Plan carefully to avoid the IRS holding onto your money in the first place. Refunds are just another way of saying that you overpaid the IRS during the year; ideally, that should never happen.
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