Millions of people are frustrated that their 2020 federal income tax refunds are missing in action in the wake of what one tax official called “the perfect storm.”
And sadly, the angst could grow in July as many families receive the first payment of up to $300 a month for the advanced Child Tax Credit, while others are left on the sidelines wondering why they didn’t get all the money they’re expecting now.
Tax troubles in the 2021 season are bound to snowball as one problem rolls along and triggers another. At some point, things can improve but for many, the question is when?
Consider, for example, if your 2020 tax return hasn’t been processed yet and your family welcomed a baby last year.
How is the Internal Revenue Service going to send you money as soon as July 15 for a child born in 2020? The child would be claimed on a 2020 return but wouldn’t show up on the 2019 tax return that the IRS would end up using to send out an advance now on your credit if that 2020 return isn’t processed yet.
What a mess.
The IRS said tax returns processed by June 28 will be reflected in the first batch of monthly payments for the advance Child Tax Credit scheduled for July 15. But others could be questioning what happened to their money.
Millions wait for their returns to be processed
Typically, tax professionals say many people will receive their federal income tax refunds within one to four weeks after electronically filing a return.
So if you filed at this year’s deadline on May 17, you’d expect that refund by mid-June or earlier. File in March and the refund should be there by April.
Filing a paper return always drags out the process, and it could take a month or more — some say maybe even three to four months — to get a refund.
Now, things are taking longer for many people.
The IRS had a massive backlog of 35.3 million individual and business income tax returns that were filed but not processed by the end of the 2021 filing season, according to the June 30 report by Erin Collins in the National Taxpayer Advocate. That’s about four times what remained unprocessed at the end of the 2019 filing season.
Every tax filer, of course, isn’t owed a refund, but millions are waiting on big money.
“Despite all its challenges, the IRS processed 136 million individual income tax returns and issued 96 million refunds totaling $270 billion during the 2021 filing season,” the report noted.
The IRS, according to the report, was dealing with a “perfect storm” of implementing three rounds of stimulus payments, dealing with reduced staffing combined with a high volume of returns that had errors and needed manual review, and the responsibilities of implementing new tax law changes that offered families economic relief during the pandemic.
The IRS, for example, needed to change its systems to recalculate unemployment insurance benefits and the Advance Premium Tax Credit involving health insurance after tax legislation was enacted in March during the filing season.
Now, unprecedented piles of tax returns require extra work and hands on processing to move that return along to the next part of the processing pipeline.
About 15.8 million returns needed further review, perhaps due to a mistake or other reason.
Another 16.8 million returns were filed by paper, instead of electronically, and waited to be processed.
And about 2.7 million amended returns faced delays, too.
A Shelby Township man wonders
James Hanlon filed his return in late March but he and his wife Janice continued to wait around the Fourth of July for what they thought would be a tax refund of around $4,800.
“My tax return has been in a black hole for three months now,” said Hanlon, who lives in Shelby Township.
Hanlon, 71, retired from a job as a retail help desk manager at Comerica Bank. He likes to problem solve and has prepared his own tax returns for years using TurboTax. He remembers one issue several years ago when he mistakenly missed reporting capital gains from a mutual fund. But otherwise, he said, everything has been fine working with tax software.
He isn’t sure what created the delay. But after hearing that the IRS had issues relating to the Recovery Rebate Credit, he began to wonder if that was the trouble spot.
The Recovery Rebate Credit found on Line 30 of the 1040 form was brand-new on the 2020 income tax returns. The worksheet itself doesn’t use the words “stimulus payments” but that’s what the worksheet involves.
The one-page worksheet has 21 lines and talks of EIP 1 and EIP 2 and says to put in a zero on some lines if $2,400 was received for EIP 1 for a couple and $1,200 was received for EIP 2 for a couple. EIP stand for Economic Impact Payment.
The credit was put on the tax return to enable people who didn’t get a first and second Economic Impact Payment, known as a stimulus. The credit also helps those who got less than the full amount owed to them to now claim what they were owed.
The IRS kept updating its website throughout the tax season to address the confusion created by the credit.
According to a May 19 update, for example, the IRS stated: “There is no need to claim the Recovery Rebate Credit or complete the worksheet if you received the full amount of the recovery rebates as Economic Impact Payments.”
Hanlon filled out a TurboTax worksheet earlier in the year as he was preparing his taxes.
After doing the worksheet, Hanlon put $3,600 on Line 30 for the Recovery Rebate Credit. He says he worked through it but now realizes that maybe he was wrong because his direct deposit information indicated that he and his wife received $2,400 in Economic Impact Payments for two people for the first stimulus payments and later another $1,200 for the second stimulus.
Those add up to $3,600 but somehow he claimed that $3,600 for the rebate, too.
“It’s either an error or just a backlog of the IRS workflow,” he said Wednesday.
Just waiting and not knowing what went wrong is unsettling. All he could find out for weeks at IRS.gov was that his return was still processing.
On Thursday morning, though, Hanlon spotted a bit of hope in his email, even though the mystery wasn’t totally solved. TurboTax sent him an email alert stating: “Your refund is on its way! It should be automatically deposited in your account by the next business day.”
Hanlon then went back to the IRS site and learned that he would indeed be getting a refund soon. But, as suspected, the IRS indicted that it found an error involving the Recovery Rebate Credit. Based on IRS information Thursday, the couple now expects to receive a federal income tax refund of around $530.
Hanlon said he and his wife, Janice — high school sweethearts who will celebrate their 50th wedding anniversary in September — aren’t too worried. They’ve lived in the same house since the 1980s, both have pensions and Social Security and they say they didn’t need a big refund to pay any big bills.
But Hanlon expects that others could have easily made the same mistake, which will create delays. His three children are in their 40s, he said, so he’s not waiting for the Child Tax Credit. But he said he can understand how those with younger families could face even more issues ahead.
Tales of unhappy returns
James O’Rilley, CPA and tax director for Doeren Mayhew in Troy, said many clients who were anticipating federal income tax refunds faced delays in early July.
Reasons for these delays, he said, include potential identity theft issues where someone else filed a return using their ID information; issues reconciling claims for the Recovery Rebate Credit with the economic stimulus payments that were sent out; and the IRS making corrections automatically and issuing extra refunds to those early filers who reported all unemployment compensation as taxable income before a March 11 change in the rules excluded some benefits from taxable income for many taxpayers.
“They do pay interest,” O’Rilley said.
But he noted that’s not comforting to many who count on a tax refund to pay bills now.
The IRS processed about 141 million individual income tax returns through June 11, based on IRS filing season statistics. But the IRS received nearly 152.5 million returns during that time, indicating that roughly 11.5 million individual returns remained in the pipeline as of mid-June. The average refund was $2,775.
People want their money.
“I probably get a call a day on this matter,” said George W. Smith, a CPA and partner for Andrews Hooper Pavlik in Southfield.
Smith said there’s not much he can tell clients who are waiting for refunds, as the IRS website for information on refunds says the same thing, over and over again: “Return received and is being processed. No estimated time for completion.”
The same keep-on-waiting story, Smith said, applies to tax refunds all across the board, big and small, easy and complex.
“There appears to me no rhyme or reason for this,” Smith said. “To further frustrate my clients, they’re getting their Michigan refunds timely.”
All of his clients who are waiting on their money had their returns filed electronically before the extended tax deadline this year, he said.
What’s causing some hold up
The IRS points to other key trouble spots that could be holding up some refunds. They include:
Claiming the Earned Income Tax Credit and electing to use one’s 2019 earnings, as was allowed by law, instead of 2020 earnings, on the 2020 return. The law was changed temporarily to allow taxpayers to still receive the credit even if they could not work during the pandemic last year but were able to work in 2019.
“We have some clients still waiting that filed as far back as March, there might be some from February as well that just haven’t been brought to my attention,” said Matt Hetherwick, director of individual tax programs for the Accounting Aid Society in Detroit, which offers free tax preparation for filers who claim the Earned Income Tax Credit for those working in low-paying to moderate-income jobs.
Antonio Brown, a CPA in Flint, said he has 11 clients still waiting for their refunds as of July 1.
He has one client who filed a return back in April — and is owed a federal income tax refund of refund of $4,142 — but the IRS system sent her a letter in late June that stated there was no record of a processed tax return. That letter was sent out, Brown said, even though he received a Form 9325 Electronic Filing Acknowledgment, which proves the return was accepted by the IRS system on April 3.
To make matters worse, he said, the client is trying to take out a mortgage to buy a home and needs a transcript of a filed tax return.
He speculates that the return may be caught up in the manual reviews for some returns claiming the Earned Income Tax Credit.
“These are the unintended consequences that come along with these excessive processing delays,” Brown said.
What happens with the Child Tax Credit
Now the delays might cause some hiccups for some when it comes to receiving an advance payment of the Child Tax Credit, another new change this year.
Using a 2019 return — if a 2020 return isn’t processed — might give the wrong financial picture of a family in 2020 and the wrong head count for qualifying children.
Eligible families will receive up to $300 per month for each qualifying child ages 5 and younger and $250 per month for children ages 6 to 17. The monthly payouts will be sent by the IRS each month from July through December this year only.
An age test is applied as of Dec. 31, 2021, so a child who is 17 through most of 2021 but is 18 by Dec. 31 would not qualify, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.
Monthly payments for the Child Tax Credit will be based on your 2020 tax return, if the IRS has processed it; or your 2019 tax return.
Tax returns processed by June 28, according to the IRS, will be used when it comes to calculating the first batch of monthly payments scheduled for July 15.
CPA Smith expressed concern that some people could end up receiving more money than they’re qualified to get — say if their income went up significantly in 2020 so they no longer qualify for the credit and the IRS is using a lower income from their 2019 returns.
On the other hand, others might receive less than they’re qualified to get now if their 2019 returns are used, and, for example, they adopted a child or had a baby in 2020.
To receive the full credit as a single parent, for example, you must meet the requirements for filing taxes as a head of household and your income must be $112,500 or less.
Or if you are single and do not meet the requirements for filing as head of household, your income must be $75,000 or less.
If married and filing a joint return, you’d qualify for the full benefit if your combined income is $150,000 or less.
It’s also important to realize that a family does not need to have income to receive the expanded credit.
The Child Tax Credit is “refundable,” meaning that even if taxpayers don’t owe income tax, the IRS will issue them a refund if they’re eligible. But they must file a tax return or register with the new Non-filer Sign-up Tool to receive it.
The good news is that only half of total credit amount will be paid in advance monthly payments from July through December. The second payment would arrive around Aug. 13 and the rest would be around the 15th of each month.
You’d claim the other half when you file your 2021 income tax return.
Another good point: The IRS notes that it will make adjustments to those monthly payouts if necessary.
For example, the IRS said: “Your advance Child Tax Credit payments will be recalculated after the IRS processes your 2020 tax return. We will adjust your remaining payments in 2021 to increase or decrease the total amount of your advance Child Tax Credit payments that should be disbursed to you during 2021.”
What if your child was born in 2021?
When it comes to a little one born in 2021, the IRS said at some point down the road later this year. you will be able use its portal at IRS.gov to update that information and start receiving the advance credit, if you qualify. That option isn’t available now, however.
In addition to losing sleep and changing diapers, you’ll need to pay attention to when the Child Tax Credit portal at IRS.gov will allow you to update information on your baby to receive the advance credit this year.
And you’d be able to reconcile the credit on the 2021 income tax return and receive what you’re owed next year, if you qualify.
Some speculate that another round of refund delays could be ahead next year, if the IRS needs to manually review returns that have mistakes when it comes to reconciling the advance payments for the Child Tax Credit.
Next year, you’re going to need to make sure what is being reported on the 2021 tax returns accurately reflects IRS records for how much of the Child Tax Credit was already paid out to you in 2021.
Hetherwick, of the Accounting Aid Society, said you need to hold onto IRS Letter 6419 that will be mailed in January 2022 to those receiving the advance Child Tax Credit this year.
IRS Letter 6419 will contain the amount of advanced payments that a tax filer received, Hetherwick said, and it will be very helpful for tax preparers to more accurately prepare tax returns.
This summer, much will depend on how quickly the IRS is able to process its backlog of tax returns and how easily people are able to use a variety of online tools at IRS.gov to update information that the IRS needs to roll out the advance Child Tax Credit.
For many, though, it looks like we could be heading into another storm.