Some people are waiting longer for tax refunds: Why they're delayed
If you've got big plans to spend that tax refund quickly, you might want to step back, take a breath and realize the money isn't hitting some bank accounts very quickly at all.
The official tax filing deadline is Monday for 2020 federal income tax returns.
Through April 30, the Internal Revenue Service received nearly 121.2 million individual income tax returns and processed nearly 110.3 million returns.
The IRS has issued nearly 81.5 million income tax refunds and the average refund amount was $2,865. It's a tad more – just 3% – than the average refund issued through the same time last year.
But the total number of refunds issued this year through April 30 was down 5.8% – or almost 5 million returns – compared with the same time a year ago.
Some people are seeing their money fairly quickly, in a few days, when returns have been filed electronically. But others, including some who claimed the Recovery Rebate Credit, continue to wait weeks on end for their money.
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For some, the delays are much longer than expected. I spoke earlier this year with several taxpayers and tax professionals who talked about filing 2020 tax returns in late February but still had not received their refund money by late April. Many were still waiting for their refund cash in early May, too.
What's the holdup?
The backlog at processing centers continues, as the IRS is dealing with staff shortages, a pile of leftover returns from last year's tax season, complex rule changes that are causing errors on many tax returns and, apparently, some shoddy equipment, too.
Among a long list of reasons for backlogs and delays in processing tax returns, the printer at the IRS could be out of ink. Seriously.
One of the more unusual excuses for the backlog of tax returns at the IRS was tucked into a report issued in May by the Treasury Inspector General for Tax Administration.
The audit team focused on tax processing centers in Ogden, Utah, and Kansas City, Missouri, Tax Processing Centers.
"A major concern that surfaced during these walkthroughs was the lack of working printers and copiers," according to the early audit relating to the 2021 filing season.
While it may sound like a problem out of the 1990s, the issues are holding up necessary steps in the system.
"The employees we spoke with stated that the IRS entered into a new contract in October 2020 to obtain new printers from a different provider. However, they indicated that the new contractor may not have been coming into the sites to replace the old printers due to COVID-19 concerns."
Many employees are worried about what happens if the working equipment stops working.
"This issue has been an ongoing challenge since March 2020."
Some see signs of hope on 2019 refunds
Some filers who were still waiting for their tax refunds owed from their 2019 income tax returns told me that they did receive their money in May with interest.
More than 8.3 million individual tax returns and transactions remained to be processed at the end of 2020, according to the Treasury Inspector General for Tax Administration.
"This represents more than a 1,200% increase in the paper-filed returns carryover inventory to the 2021 filing season when compared to a normal processing year’s filing season carryover inventory," the watchdog agency said.
Efforts to clear up that backlog cut into work that can be done to tackle other problems this tax season.
"For example, some tax examiners are assigned solely to work returns received in Calendar Year 2020 while others only process current year returns," the inspector general's report stated.
And if early filers this year ran into trouble, it's likely that some who file by the extended deadline of May 17 could need to wait for their refunds longer than expected.
James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, Michigan, said it seems that most 2020 returns filed so far have had tax refunds issued fairly quickly if the return has no unusual items.
But he said some clients have experienced delays if they've already received some stimulus money but then claimed additional Recovery Rebate Credit on the 2020 return, as allowed, due to an increase in income in 2020 or another issue, such as a marriage or birth of a child.
Mike Savage, CEO of 1-800Accountant, said in an email that the IRS is holding 29 million tax returns for manual processing, contributing to more refund delays than typical. He blamed sweeping tax code changes, limited resources, outdated IT systems and a backlog of unprocessed 2019 paper tax returns.
Things that can delay a refund include filing a paper return as well as claiming certain credits, including the Earned Income Tax Credit.
Why your refund could end up smaller than expected
Many stimulus efforts and tax breaks can help taxpayers this year see more money.
But some taxpayers could be surprised that their tax refunds will turn out smaller than expected, too.
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Catherine Martin, senior tax research analyst at The Tax Institute at H&R Block, said some taxpayers ended up being surprised by a tax liability this year after they took money out of their retirement account in 2020.
The Coronavirus Aid, Relief, and Economic Security Act made it easier to avoid penalties and spread out the taxes associated with withdrawals from retirement savings if you qualify. The money needed to be taken out of retirement savings from Jan. 1, 2020, to Dec. 30, 2020.
For example, you'd avoid the possible 10% early withdrawal penalty if you're younger than age 59½ and qualify for a coronavirus-related withdrawal.
In addition, the regular taxes owed could be spread out over three years.
But again, you need to know and follow the rules.
Martin noted that the CARES Act made it easier for those directly facing financial and health issues from the effects of the coronavirus pandemic to cash out retirement funds.
"With the new rules, you might be able to take a penalty-free distribution from your 401(k) or your IRA," she said.
"Although many people qualified for an exception to the 10% additional tax on early withdrawals, some may not have realized a distribution may still be taxable."
Another possible reason you're facing a smaller refund?
You could have calculated the Recovery Rebate Credit wrong. The IRS has noted mistakes in this area and is sending letters to taxpayers when adjustments need to be made.
Or some people who lost jobs during the pandemic could still be facing taxes on their unemployment benefits.
Many people did not withhold any taxes from their unemployment benefits in 2020.
"Without withholding taxes from your unemployment benefits," Martin said, "it is possible for you to be surprised by a tax bill or a significantly reduced refund when you file your 2020 return this tax season."
While some might qualify for a new tax break, others might not.
American Rescue Plan Act, which signed into law on March 11, puts a new rule into place where a portion of jobless benefits received in 2020 won't be taxed for many people. But some could still see their jobless benefits taxed.
The waiver applies to households earning up to $150,000. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation.
The income cap is the same for singles, married couples filing joint returns and head of household.
But only up to the first $10,200 of unemployment compensation is not taxable for an individual. And this tax break only applies to 2020.
The rules, again, are complicated. It is possible that if both spouses lost work in 2020, a married couple filing a joint return might not have to pay federal income taxes on up to $20,400 in jobless benefits.
It can be a little confusing, though. If, for example, one spouse received $15,000 in jobless benefits in 2020 that spouse would qualify for only a $10,200 waiver. If the other spouse received just $1,000 in unemployment compensation in 2020, then the exclusion for tax purposes that the couple would receive would be $11,200 – not $16,000.
The Treasury Inspector General for Tax Administration's May report indicated that its analysis of tax returns processed as of March 4 indicated that the IRS had received more than 7.4 million tax returns reporting unemployment compensation.
"Of the 7.4 million tax returns, nearly 7.3 million – or 98.6% – had modified adjusted gross income of less than $150,000 and would likely qualify for the exclusion," the report noted.
The IRS is asking that taxpayers do not file an amended return unless the reduction in their income would enable them to qualify for a tax credit not already claimed on the return.
"The IRS will recalculate taxes on unemployment benefits," according to the Treasury Inspector General for Tax Administration report.
IRS said it would take steps to automatically refund money this spring and summer to people who filed their tax returns reporting unemployment compensation before the recent tax break for jobless benefits was put into place in March.
The first special refund payouts were initially expected to be made in May and continue into the summer. No more updates were given by the IRS as ofWednesday.
The special tax break on jobless benefits only applies to unemployment compensation received in 2020. Those receiving unemployment benefits in 2021 will want to have taxes withheld from those benefits now or prepare to pay taxes when they file their returns in 2022.