The Internal Revenue Service is girding for the official start to tax season Friday as taxpayers and preparers deal with tax breaks related to COVID-19 and questions about stimulus payments.
The IRS recently updated its annual Publication 17 guide to preparing individual tax returns with the latest information on all the tax changes in 2020, including updates to important forms in multiple languages, the Earned Income Tax Credit, IRS Free File, the taxability of unemployment compensation and the Recovery Rebate Credit. The IRS also revamped the format of Publication 17 to ease navigation and make it quicker to download than previous editions. The 2020 edition is also now accessible on most personal devices. The IRS has also rolled out a new online option to “Submit Forms 2848 and 8821 Online” that will help tax professionals remotely obtain signatures from individual and business clients and submit authorization forms electronically.
The IRS pushed back the traditional late January start to tax season as it continues to deal with distributing the latest round of Economic Impact Payments and implementing tax regulations stemming from the CARES Act and other relief packages passed by Congress last year. That means tax professionals will need to contend with a more compressed tax season than usual, along with uncertainty about what tax breaks will be in the stimulus legislation currently being shaped in Congress that could affect last year’s taxes.
“We will start accepting tax year 2020, individual tax returns, tomorrow,” said IRS Wage and Investment Division commissioner Ken Corbin during a press conference Thursday. “That’s Friday, Feb. 12. And we are ready this year. We expect to process more than 160 million individual tax returns. We know taxpayers rely on us for the information and help they may need to meet their tax obligation.”
Not all tax preparers think the IRS is quite so ready yet. “This is the latest start in my career,” said Knox Wimberly, an enrolled agent and CEO of Taxaroo, a tax practice management software company. “And we have some real ambiguity still from Congress in terms of some retroactive tax bills that are going to come into play.”
On the other hand, many preparers weren’t thrilled with last year’s protracted tax season that lasted until July 15 after the IRS extended the filing deadline due to the pandemic. They may welcome a shorter time period, although many clients may want to file for an extension until some of the lingering uncertainties are resolved.
The IRS had to delay the start of tax season in order to focus on distributing the second round of Economic Impact Payments authorized by Congress last December to help taxpayers cope with the economic fallout from the pandemic. “Our focus as the pandemic continues is to help taxpayers and the tax industry in a way that ensures the safety of our employees and the safety of the taxpayers we serve,” said Corbin. “There are a couple of important steps that they can take which will greatly improve their experience this year and help them get their refunds faster. The first step is to gather your documents, make sure you have everything before filing your return or visiting your preparer. Most taxpayers already receive their Form W-2, which is a wage and tax statement from their employers and Form 1099 from other payers. If you didn’t, you should first check with your employer or pay your mail.”
He acknowledged that mail delivery has been affected in some areas due to the pandemic. “We ask that if you’re missing a W-2 or income-related form, please wait until the end of February if you need to call the IRS, if you are expecting a refund,” said Corbin. “I know it’s tempting to conclude that you cannot wait until you have all your information, but if your return requires review, it may slow the processing of any refund you are due. Taking this precautionary step will also help people avoid filing an amended return later in the year. That’s something that adds burden to everyone.”
He is advising taxpayers to file electronically this tax season and to opt for direct deposit of their tax refunds. “We work extensively with the tax industry throughout the year to make updates to key federal tax forms and instructions,” said Corbin. “This ensures recent tax law changes are incorporated and also coordinated with partners who develop the software used by individuals and tax professionals to prepare and file their returns. Choosing to file electronically is the safest way to file an accurate return and the quickest way to get your refund tax software walk taxpayers through the process and significantly reduces the chance of errors on their tax return, which minimizes the likelihood of a tax return or require review and slow down a refund and file a direct deposit.”
He also recommended that taxpayers take advantage of the Free File program if they earned less than $72,000 last year. The IRS has improved the program so taxpayers aren’t steered toward paying for more expensive options from tax software companies who are supposed to provide the software for free for simple tax returns.
For taxpayers who prefer to get help from a professional, he advised them to check a directory on the IRS’s website of preparers who have credentials recognized by the IRS or have completed an IRS continuing education program.
“We urge you to check your tax return preparer’s qualifications and history and choose wisely because you are responsible for the information on your income tax return no matter who prepares it,” said Corbin. “We have several options on IRS.gov, not just for finding a tax preparer. One new source is the Choosing a Tax Professional page on IRS.gov, which offers a wealth of information for selecting a tax professional. The directory of federal tax return preparers with credentials and qualifications that can help taxpayers find preparers in their area who currently hold professional credentials recognized by the IRS or who hold an Annual Filing Season Program record of completion.”
The IRS expects to issue most refunds within 21 days, but some refunds may take longer, Corbin acknowledged. He advises taxpayers to check the status of their refund by visiting the Where’s My Refund page on IRS.gov. They can do that as soon as 24 hours after the tax return has been electronically submitted.
However, tax returns that claim refundable tax credits like the Earned Income Tax Credit and the Additional Child Tax Credit are required by law to undergo additional compliance checks to make sure the tax refunds aren’t being claimed by identity thieves and tax scammers. However, given the economic misery caused by the pandemic, those tax refunds will be eagerly awaited by many legitimate taxpayers who desperately need the money. Corbin said early filers can expect to find information about those returns posted on the Where’s My Refund page by Feb. 22, and the refunds will be deposited in taxpayers’ accounts by the first week of March if they opted for direct deposit and there are no other issues with the return.
Many taxpayers who lost their jobs in 2020 will need to include unemployment compensation on their tax returns, some of them for the first time, while other taxpayers who may have worked in the gig economy for the first time last year as a result of losing their full-time jobs, will also need to enter the amount they earned on their tax return.
“That income is taxable and must be reported,” said Corbin. “As the pandemic continues, we remain focused on supporting the federal government’s efforts to help those experiencing financial changes and challenges. I’m proud of the work we’ve done to issue more than 160 million of the first round of Economic Impact Payments while simultaneously managing an extended 2020 filing season. As we prepared for this filing season, we’ve issued over 140 million of the second payments, many as early as two days after the legislation was signed Dec. 27.”
It’s possible that Congress will make the unemployment payments in 2020 exempt from taxes this season, but that hasn’t been decided yet. “We still have some provisions that are likely to be retroactive to come from Congress, particularly around unemployment,” said Wimberly of Taxaroo. “With the ambiguity around unemployment, I’m seeing more professionals who are curious about whether or not they should hold files that have unemployment. Are we going to end up filing a whole bunch of amendments? Will the IRS use their math authority to automatically correct? None of this is known. Some practitioners are suggesting that we should encourage our clients to hold off if they have unemployment. In the under 25 percent tax bracket, $10,200 is a significant amount of tax difference that could be on a return.”
The child tax credit may be increased in the new stimulus package under the Biden administration’s proposals. “It looks like that will probably impact 2021 more than 2020, but we’re going to see several retroactive tax provisions there,” said Wimberly.
The various stimulus packages, including the Families First Coronavirus Response Act, the CARES Act, the Paycheck Protection Program Flexibility Act, and the Consolidated Appropriations Act that passed in December, have created lots of extra work for tax professionals to make sure their clients were able to take advantage of them. “All of these laws contained a lot of tax provisions,” said Wimberly. “Professionals are a little bit overwhelmed, particularly with some of the retroactive activity.”
Taxpayers who didn’t receive an Economic Impact Payment last year or who didn’t receive the full amount to which they were entitled can claim it as a Recovery Rebate Credit on line 30 of their 1040 or 1040-SR this year. There is a Recovery Rebate Credit Worksheet available to help them figure the correct amount to claim. “The credit will be paid as part of your refund,” said Corbin. “If you have direct deposit will help you receive that money as quickly as possible.” Those who received the full amount of the payment don’t need to include it on their tax return, he added.
The IRS has introduced a new way for taxpayers to access their tax account information with the IRS online, which can help with figuring the Recovery Rebate Credit. “To be eligible for the RRC, you’ll need the amount of any Economic Impact Payments you received in order to calculate it using the RRC worksheet or your tax preparation software,” said David Alito, deputy commissioner of the IRS Wage and Investment Division, during the press conference. “This year, you can log on to your federal tax account information on IRS.gov and view the amounts of the Economic Impact Payments you might have received. While in your account, you can also view any amounts owed, payment history, installment agreement information, tax records and key tax return information for the most recent tax returns as originally filed. You can visit IRS.gov/secureaccess to view the required identity authentication process.”
To prevent identity theft, the IRS has now extended its Identity Protection PIN program to any taxpayer who wants the protection. “Taxpayers nationwide can now opt in to the IP PIN program through the online tool,” said Alito. “The Identity Protection PIN, which we call IP PIN, is a six-digit number known only to the taxpayer and to the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayer’s Social Security number. Other items that are new from a tax law perspective this year impact two important tax credits. Taxpayers may use their 2090 earned income figure to figure their Earned Income Tax Credit if they earned more income in 2019 than in 2020. The same is true for the Additional Child Tax Credit. This could increase the credit for someone who might have lost their job or worked reduced hours because of the pandemic. hese returns can be filed electronically, and tax software will help taxpayers calculate the credit using either the 2020 or the 2019 income.”
Because of income changes in 2020, people may qualify for the EITC when they didn’t previously, he noted. “We have another tool to help these people. Taxpayers earning $56,844 or less can see if they qualify using the EITC Assistant tool on IRS.gov/EITC.“
The EITC Assistant is available in both English and Spanish, and helps users determine if they are eligible, if their children need the qualifying child rules and it estimates the amount of the EITC they may get, he noted.
Other tax law changes he pointed to include IRA contributions. “For 2020 and later, there is no age limit on making regular contributions to traditional or Roth IRAs,” said Alito. “You can make tax deductible IRA contributions past age 70 and a half. For charitable contribution deductions without itemizing, taxpayers who choose the standard deduction may be eligible to take a charitable deduction or cash contributions up to $300 to qualifying charities in 2020 without having to itemize. Teachers can include unreimbursed expenses for personal protective equipment, disinfectant and other supplies used for the prevention of the spread of COVID-19 in the classroom as part of their $250 deduction for classroom expenses.”